AC_2012_Fixed Rate Bonds_Final Prospectus_8 Nov 07

Transcription

P5,000,000,000.00 Fixed Rate Bonds due 2012
Issue Price: 100% Face Value
Coupon Rate: 6.825% p.a.
Ayala Corporation is offering Bonds due 2012 (the “Bonds”) with an aggregate principal amount of P5,000,000,000.00 (the
“Offer”). In the event of an oversubscription, and following consultation with the Joint Lead Underwriter and Bookrunner, the
Issuer reserves the right to increase the Offer size up to P8,000,000,000.00, subject to the registration requirements of the
Philippine Securities and Exchange Commission (“SEC”) (the “Oversubscription Option”).
The Bonds shall have a term of five (5) years and one (1) day from the Issue Date, with a fixed interest rate equivalent to
6.825% p.a. Interest on the Bonds shall be payable quarterly in arrears on February 22, May 22, August 22 and November 22
of each year (each of which is a “Coupon Payment Date”) commencing on February 22, 2008 or the subsequent Business Day
without adjustment if such Coupon Payment Date is not a Business Day. The last coupon payment date shall fall on the
Maturity Date (as defined below) while the Bonds are outstanding (see “Description of the Bonds” – “Coupon”).
The Bonds will be redeemed at par (or 100% of face value) on November 22, 2012 (the “Maturity Date”) or as otherwise set out
in “Description of the Bonds” – “Redemption and Purchase” and “Payment in the Event of Default” sections of this Prospectus.
The Bonds shall constitute the direct, unconditional, unsubordinated, and unsecured obligations of Ayala and shall at all times
rank pari passu and rateably without any preference or priority amongst themselves and at least pari passu with all other
present and future unsubordinated and unsecured obligations of Ayala, other than obligations preferred by law. The Bonds will
effectively be subordinated in right of payment to all of Ayala’s secured debts to the extent of the value of the assets securing
such debt and all of its debt that is evidenced by a public instrument under Article 2244(14) of the Civil Code of the Philippines.
The Bonds have been rated Aaa by the Philippine Rating Services Corporation (“PhilRatings”) as of 24 October 2007. The
rating denotes the smallest degree of investment risk where interest payments are protected by a large or by an exceptionally
stable margin and principal is secured. The rating is not a recommendation to buy, sell, or hold securities and may be subject
to revision, suspension, or withdrawal at any time by the rating agency concerned.
The Bonds shall be offered to the public at face value through the Issue Manager and the Joint Lead Underwriter and
Bookrunner named below with the Philippine Depository and Trust Corporation (“PDTC”) as the Registrar of the Bonds. It is
intended that upon issuance, the Bonds will be lodged with the PDTC. On the Issue Date, the Bonds will be issued in scripless
form and in denominations of P50,000.00 each, as a minimum, and in multiples of P50,000.00 thereafter. The Bonds will be
eligible for trading under the Scripless Book entry System of the PDTC. Transfers of the Bonds should be coursed through a
PDTC Participant in the PDTC system. (See “Description of the Bonds” – “Form, Trading and Denomination”)
Ayala intends to cause the listing of the Bonds on a securities exchange licensed with the SEC and has initiated discussions
with the Philippine Dealing and Exchange Corp ("PDEx") for this purpose. However, there can be no assurance that such a
listing will actually be achieved either before or after the Issue Date or whether such a listing will materially affect the liquidity of
the Bond on the secondary market. Such a listing would be subject to the Company's execution of a listing agreement with
PDEx that may require the Company to make certain disclosures, undertakings and payments on an ongoing basis. There can
also be no assurance that such a listing will be approved, and if obtained, whether such approval will be in effect until the
Maturity Date.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE SECURITIES
OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND SHOULD BE
REPORTED IMMEDIATELY TO THE SEC.
__________________________________
The date of this Prospectus is November 8, 2007
Issue Manager
BPI CAPITAL CORPORATION
Joint Lead Underwriters and Bookrunners
BPI CAPITAL CORPORATION
BDO CAPITAL & INVESTMENT CORPORATION
FIRST METRO INVESTMENT CORPORATION
ING BANK, N.V., MANILA BRANCH
LAND BANK OF THE PHILIPPINES
STANDARD CHARTERED BANK
Definition of Terms
Joint Lead Underwriters and Bookrunner and subject to the SEC’s
registration requirements.
PAS
Philippine Accounting Standards
Paying Agent
BPI Stock Transfer Agency
PDTC
Philippine Depository and Trust Corporation.
Pesos or P
Philippine pesos, lawful currency of the Republic of the Philippines
PFRS
Philippine Financial Reporting Standards
PSE
Philippine Stock Exchange
Registrar
Philippine Depository and Trust Corporation
SEC
Securities and Exchange Commission
Trustee
Land Bank of the Philippines – Trust Banking Group
3
SUMMARY
The following summary is qualified in its entirety by the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus.
THE COMPANY
Ayala Corporation (“Ayala”) was incorporated in the Philippines on January 23, 1968 as a limited
liability corporation having a renewable term of 50 years. It is organized as a holding company
holding equity interests in the Ayala group (the “Group”), one of the most significant business groups
in the Philippines. Ayala’s business activities are divided into four key areas of activity: (a) real estate
and hotels, (b) financial services, (c) telecommunications and (d) a portfolio of other investments held
under an internal development division called AC Capital (“AC Capital”).
Ayala’s real estate and hotels business is primarily conducted through its subsidiary, Ayala Land, Inc.
(“Ayala Land”), a diversified real estate company in the Philippines. Its involvement in financial
services and insurance businesses is done through an affiliate, the Bank of the Philippine Islands
(“BPI”), which, together with its subsidiaries (together, the “BPI Group”), form a universal banking
group in the Philippines. Ayala’s telecommunications business is carried out through an affiliate,
Globe Telecom, Inc. (“Globe”), one of the leading telecommunications companies in the Philippines.
Under AC Capital are Ayala’s investments in water distribution, electronics manufacturing, automotive
dealerships, joint ventures in international real estate assets, information technology-related ventures
and various non-core assets and investments through a variety of subsidiary and affiliated
companies.
Ayala became a publicly listed corporation in 1976 when it listed its common shares with the then
Makati Stock Exchange. As of June 30, 2007, Ayala had a market capitalization of P225.6 billion. In
addition, certain members of the Ayala group, namely Ayala Land, BPI, Globe, Manila Water
Company, Inc. (“Manila Water”), Cebu Holdings, Inc. (“CHI”), and Cebu Property Ventures
Development Corporation (“CPVDC”) are likewise publicly listed corporations. Some of Ayala’s
subsidiaries and affiliates have extensive holdings in the equity of other subsidiaries and affiliates.
Members of the Zobel de Ayala family, individually and through their control of Mermac, Inc., a private
holding company incorporated in the Philippines (which held 50.9% of Ayala as of June 30, 2007), are
the dominant shareholders of, and effectively control, Ayala. Ayala’s other current principal
shareholders are Mitsubishi Corporation (“Mitsubishi”) (which held 10.6% of Ayala as of June 30,
2007) and Shoemart, Inc. (which held 3.2% of Ayala as of June 30, 2007).
FINANCIAL HIGHLIGHTS
For the six months ended June 30, 2007, Ayala's unaudited consolidated revenues were at P41.0
billion, and its unaudited consolidated net income was at P11.5 billion.
As at June 30, 2007, Ayala's unaudited consolidated total assets were valued at P190.2 billion and its
unaudited shareholders' equity was P86.0 billion.
Consolidated net income of P11.5 billion was driven by a combination of factors:
•
Fundamental operating performance of major business units remained strong and kept equity
earnings stable year-on-year at P6.4 billion. The table below shows the net income of Ayala’s
4
Summary
business units for the period ended June 30, 2007 vs. the same period of the prior year.
Among the listed companies, BPI posted the highest growth rate of 24%, driven by the
expansion of its net interest and non-interest income. Ayala Land’s net income was 12%
higher year-on-year despite the impact of non-recurring items which pushed total revenues
4% lower year-on-year to P12.3 billion. The net income of Manila Water Company, Inc.
(“MWC”) declined 9% due to the expiration of its income tax holiday, although pre-tax income
was up 30% on account of its record billed volume and non-revenue water levels.
•
During the period, earnings were enhanced by capital gains from the sale of Ayala’s shares in
Ayala Land, BPI and Globe. Ayala generated a total of P7.0 billion in capital gains from these
transactions.
•
Financing expense at the parent level, inclusive of preferred dividends, reached P1.7 billion
from January to June 2007, 19% lower than the P2.1 billion in the same period in 2006. The
continued decline in financing expense is reflective of Ayala’s continuous efforts to prepay
and/or refinance higher-cost debt to take advantage of the low interest rate environment.
Ayala continued to receive dividends with dividend flows reaching P4.2 billion in the first half of 2007
(see chart below).
Dividend Flows (in billion pesos)
8
6.73
6
5.54
5.25
4.71
4.24
ALI
4
BPI
2.65
2.16
2
Globe
1.51
AC Capital
0
2000 2001 2002 2003 2004 2005 2006 1H07
5
Summary
Net Income of Subsidiaries and Affiliates
(P millions)
Ayala Land
BPI
Globe
AC Capital
Manila Water
IMI
Ayala Automotive
Ayala International
First-half 2007
First-half 2006
Change
2,126
5,715
6,425
1,896
4,592
5,759
+12%
+24%
+12%
1,118
639
166
332
1,234
996
134
125
-9%
-36%
+24%
+166%
STRATEGY
Ayala seeks to ensure that the Group maintains its commitment to its business activities in the
Philippines and to explore possible international initiatives on a selective and opportunistic basis.
Ayala intends to build on its leadership position in the Group's existing core businesses in real estate,
financial services and telecommunications, and actively manage its portfolio of other investments and
assets under AC Capital with a view toward maximum value creation and realization. Ayala expects
its real estate, financial services and telecommunications businesses to remain its principal sources
of dividend income, but contributions from its water distribution, electronics manufacturing and auto
dealership operations are increasing. Ayala is presented from time to time with opportunities to invest
in new business areas and will continue to consider such opportunities to the extent that such
business would contribute to the overall strategic objectives of the Group.
FUTURE PLANS AND PROSPECTS
Ayala is confident that its financial prospects remain sound and are expected to strengthen further in
the coming years as the broad Philippine economy gathers momentum. Ayala’s earnings are
expected to continue on an upward trend, driven by the cyclical upturn in the property and banking
sectors, the continued albeit less robust growth of the telecommunications sector, as well as the
growing contributions from the total earnings derived from the AC Capital portfolio. Improved earnings
prospects are particularly expected from Ayala Land and BPI, especially as these are well-positioned
industry leaders and are expected to benefit from sectoral growth in their industries.
Ayala is committed to reducing its gearing and strengthening its balance sheet further over the
medium term. Dividend flows to the Company have increased significantly over the last few years and
this is a trend that is expected to be sustained as the operating cash flow at the subsidiary and
affiliate level continues to improve. The increase in dividend flows to Ayala, in addition to any
additional liquidity arising from possible capital reallocation and value realization in Ayala’s
investment portfolio, is expected to facilitate Ayala’s deleveraging efforts moving forward.
As a holding company, Ayala is also committed to explore new investment opportunities that will be
the source of company growth in future investment cycles.
6
Summary
SUMMARY FINANCIAL INFORMATION
The following tables set forth financial and operating information on Ayala. Prospective purchasers of the Bonds
should read the summary financial data below together with the financial statements, including the notes thereto,
presented as an Annex and the “Management’s Discussion and Analysis of Financial Condition and Results of
Operation” section of this Prospectus. The summary financial data for the two years ended December 31, 2006
and December 31, 2005 are derived from Ayala’s audited financial statements, including the notes thereto, which
are found elsewhere in this Prospectus.
The following table summarizes the financial highlights of Ayala’s consolidated financial performance:
Consolidated Income Statement Data
in P millions
(Unaudited)
As of June 30
2007
(Audited)
As of December 31
2006
2006
2005*
Income Statement Data
Total revenues
Net income
Net income attributable to
Equity holders of the parent
Minority interest
41,007
12,792
35,716
8,404
70,166
14,468
50,543
10,090
11,491
1,301
7,310
1,094
12,177
2,291
8,198
1,892
Consolidated Balance Sheet Data
in P millions
(Unaudited)
As of June 30
2007
(Audited)
As of December 31
2006
2005
Balance Sheet Data
Assets
Total current assets
Non-current accounts and notes receivable
Land and improvements – net
Investments in associates, joint ventures and
others
Investments in bonds and other securities
Investment in real properties – net
Property, plant and equipment – net
Other non-current assets
Total assets
62,359
3,891
16,189
69,514
58,012
2,520
16,175
68,569
46,508
5,631
16,604
63,808
5,189
16,347
9,097
7,631
3,462
16,795
9,057
7,742
2,073
17,012
9,917
6,293
190,217
182,332
167846
33,154
33,739
32,407
38,518
29,940
46,507
2,500
7,817
26,991
86,016
2,500
7,073
24,699
77,135
2,500
6,116
21,589
61,194
190,217
182,332
167,846
Liabilities
Total current liabilities
Long-term debt - net of current portion
Cumulative redeemable preferred shares – net of
current portion
Other non-current liabilities
Minority interest
Equity attributable to equity holders of the parent
Total liabilities and equity
* Restated in 2006 to effect new accounting standards.
7
Summary
CAPITALIZATION
The following table sets forth Ayala’s audited consolidated cash position, short-term and long-term debt and
capitalization as at December 31, 2006. This table should be read in conjunction with the notes thereto located
elsewhere in this Prospectus.
(in P millions)
Audited
As of December
31, 2006
Short-term debt
Banks and other financial institutions………………………………...
Current portion of long-term debt …………………………………….
2,504
9,360
Total short-term debt…………………………………………………...
11,864
Long-term debt
Syndicated term loan…………………………………………………...
Banks and other financial institutions………………………………...
1,250
17,108
Bonds due 2007………………………………………………………...
Bonds due 2008………………………………………………………...
Bonds due 2009………………………………………………………...
Fixed-rate corporate notes…………………………………………….
3,000
2,000
7,043
10,770
8.125% guaranteed notes……………………………………………..
6,707
Less: Current portion…………………………………………………...
9,360
Total long-term debt ……………………………………………………
38,518
Cumulative redeemable preferred shares………………………..
2,500
Minority interest in consolidated subsidiaries…………………..
24,699
Stockholders' equity
Capital stock  P50 par value
Common Shares
Authorized  380,000,000 shares
Issued and subscribed  344,854,000 shares……….………….
Preferred Stock-B
Authorized – 58,000 shares
Issued and subscribed 58,000 shares
Additional paid-in-capital …………………………………………….
Cumulative translation adjustments ………………………………….
Subscriptions receivable……………………………………………….
Retained earnings ……………………………………………………...
Share - based payments……………………………………………….
Net unrealized gain on available for sale financial assets…………
Cost of shares in treasury……………………………………………...
Equity attributable to equity holders of the parent……………...
8
17,243
5,800
335
(298)
(240)
51,659
558
2,078
77,135
Summary
THE OFFER
Issue Size
Five billion pesos (P5,000,000,000.00) subject to an Oversubscription Option.
Issue Price
At par (or 100% of face value). The interest rate of the Bonds are discussed under the heading
“Coupon” below, in this Summary and in the “Description of the Bonds” section of this prospectus.
Offering
The Bonds shall be offered to the public by Ayala through the Joint Lead Underwriters and
Bookrunners as described in this Prospectus (see “Plan of Distribution”).
Offer Period
The Offer shall commence at 1:00 pm on November 12, 2007 and end at 3:00 pm on November 16,
2007.
Issue Date
The Bonds are expected to be issued on November 21, 2007.
Maturity Date
Unless earlier redeemed, the Bonds shall be redeemed by Ayala on November 22, 2012.
Coupon
Coupon Rate
The Bonds shall bear interest at a fixed rate of 6.825% p.a. (the “Coupon Rate”) accruing from Issue
Date until the Maturity Date or when the Bonds are otherwise redeemed in accordance with the Trust
Indenture (see “Description of the Bonds”). The Coupon Rate was determined by negotiation
between Ayala and the Joint Lead Underwriters and Bookrunners.
USE OF PROCEEDS
If the Oversubscription Option will not be exercised, the net proceeds from the Offer are estimated to
be P4,947,161,875.00 after deducting expenses relating to the issuance of the Bonds. Proceeds of
the Offer will be used by Ayala to refinance peso and USD denominated obligations which have been
prepaid in 2007 and for general working capital, without any allocation and with no particular order of
priority. This is discussed in more detail in the discussion in the “Use of Proceeds” section of this
Prospectus.
RISKS OF INVESTING
Prospective investors in the Offer should consider the current and immediate political and economic
factors in the Philippines as a principal risk for investing. Political instability and threats to the local
and regional currencies may also influence the operation, growth, and profitability of Ayala and its
operating companies. Other risks of prime and equal importance are the following: (a) the structure of
Ayala as a holding company whose revenues and distributable earnings are largely dependent on the
operations of its subsidiaries and affiliates and on the dividend declarations of these companies; (b)
the highly capital intensive nature of some of Ayala ’s principal subsidiaries (property development,
telecommunications, and water utilities) requiring a considerable level of capital investments to keep
9
Summary
market position and sustain growth; (c) the competitive business environment of Ayala’s operating
subsidiaries and affiliates; (d) the distinct industry risks associated with Ayala’s operations in four key
areas; (e) the likely effects of government regulations on Ayala’s businesses in real estate, banking,
telecommunications, and water utilities which operate in a highly regulated environment; (f) the
general political and economic situation of the country; (g) the volatility of foreign currency rates in the
Philippines; and, (h) the liquidity of this Issue prior to maturity. (See “Risk Factors”)
10
DESCRIPTION OF THE BONDS
The following does not purport to be a complete listing of all the rights, obligations, or privileges of the Bonds.
Some rights, obligations, or privileges may be further limited or restricted by other documents. Prospective
investors are enjoined to carefully review the Articles of Incorporation, By-Laws and resolutions of the Board of
Directors and Shareholders of Ayala, the information contained in this Prospectus, the Trust Indenture,
Underwriting Agreement, and other agreements relevant to the Offer.
The issue of up to P8,000,000,000.00 aggregate principal amount of 6.825% p.a. fixed rate bonds
(the “Bonds”) was authorized by a resolution of the Board of Directors of Ayala Corporation (the
“Issuer”) dated October 22, 2007. The Bonds shall be constituted by a Trust Indenture Agreement
(the “Trust Indenture”) to be executed on November 12, 2007 between the Issuer and Land Bank of
the Philippines – Trust Banking Group (the “Trustee” which expression shall wherever the context
permits, include all other persons or companies for the time being acting as trustee or trustees under
the Trust Indenture). The description of the terms and conditions of the Bonds set out below includes
summaries of, and is subject to, the detailed provisions of the Trust Indenture. A paying agency and
registry agreement shall be executed on November 12, 2007 (the “Paying Agency and Registry
Agreement”) in relation to the Bonds between the Issuer and the Bank of the Philippine Islands as
paying agent (the “Paying Agent”), and Philippine Depository and Trust Corporation as registrar (the
“Registrar”) and the Issuer respectively. The Bonds will be offered and sold through a general public
offering in the Philippines, and issued and transferable in minimum principal amounts of fifty thousand
pesos (P50,000.00) and integral multiples thereof. The Bonds will mature on November 22, 2012,
unless earlier redeemed by the Issuer pursuant to the terms thereof and subject to the provisions on
redemption and payment below.
Copies of the Trust Indenture, the Paying Agency and Registry Agreement are available for
inspection during normal business hours at the specified offices of the Trustee. The holders of the
Bonds (the “Bondholders”) are entitled to the benefit of, are bound by, and are deemed to have notice
of, all the provisions of the Trust Indenture and are deemed to have notice of those provisions of the
Paying Agency and Registry Agreement applicable to them.
FORM, DENOMINATION AND TITLE
Form and Denomination
The Bonds are in scripless form, and will be issued and traded, in denominations of P50,000 each, as
a minimum, and in multiples of P50,000 thereafter.
Title
Legal title to the Bonds will be shown in the register of Bondholders (the “Register of Bondholders”)
maintained by the Registrar. A notice confirming the principal amount of the Bonds purchased by
each applicant in the Offering will be issued by the Registrar to all Bondholders following the Issue
Date. Upon any assignment, title to the Bonds will pass by recording of the transfer from the
transferor to the transferee in the electronic Register of Bondholders maintained by the Registrar.
Settlement in respect of such transfer or change of title to the Bonds, including the settlement of any
cost arising from such transfers, including but not limited to documentary stamps taxes, if any, arising
from subsequent transfers, shall be for the account of the relevant Bondholder.
11
Description of the Bonds
BOND RATING
The Bonds have been rated “Aaa” by PhilRatings. The rating is subject to regular annual reviews, or
more frequently as market developments may dictate, for as long as the Bonds are outstanding. After
Issue Date, the Trustee will monitor the compliance of the Bonds with the regular annual reviews.
TRANSFER OF BONDS
Register of Bondholders
The Issuer will cause the Register of Bondholders to be kept by the Registrar, in electronic form. The
names and addresses of the Bondholders and the particulars of the Bonds held by them and of all
transfers of Bonds shall be entered into the Register of Bondholders. As required by Circular No. 42804 issued by the Bangko Sentral ng Pilipinas (“BSP”), the Registrar shall send each Bondholder a
written statement of registry holdings at least every quarter (at the cost of the Issuer) and a written
advice confirming every receipt or transfer of the Bonds that is effected in the Registrar’s system (at
the cost of the relevant Bondholder). Such statement of registry holdings shall serve as the
confirmation of ownership of the relevant Bondholder as of the date thereof. Any requests of
Bondholders for certifications, reports or other documents from the Registrar, except as provided
herein, shall be for the account of the requesting Bondholder.
Transfers; Tax Status
During the period from the Issue Date, until and including ten (10) days prior to the first Coupon
Payment Date, (the “Unrestricted Period”) bondholders may transfer their Bonds at anytime,
regardless of tax status of the transferor vis-a-vis the transferee. After the Unrestricted Period,
Bondholders may transfer their Bonds at anytime to transferees of similar tax status only. Transfers
between Bondholders of different tax status (i.e. tax exempt transferor to tax liable transferee or vice
versa) shall only be allowed and recorded by the Registrar on any Coupon Payment Date. A
Bondholder claiming tax-exempt status is required to submit a written notification of the sale or
purchase to the Trustee and the Registrar, including the tax status of the transferor or transferee, as
appropriate, together with the supporting documents specified under “Payment of Additional
Amounts; Taxation”, below, within three (3) days from the settlement date for such transfer.
RANKING
The Bonds constitute direct, unconditional, unsecured and unsubordinated Peso-denominated
obligations of the Issuer and will rank pan passu and rateably without any preference or priority
amongst themselves and at least pan passu with all other present and future unsecured and
unsubordinated obligations of the Issuer, other than obligations preferred by the law.
COUPON
Coupon Payment Dates
Each Bond bears coupon on its principal amount from and including Issue Date at the rate of 6.825%
per annum, payable quarterly in arrears on February 22, May 22, August 22 and November 22 in
each year (each of which, for purposes of this clause is a “Coupon Payment Date”) commencing on
February 22, 2008 or the subsequent Business Day without adjustment if such Coupon Payment
Date is not a Business Day. The last Coupon Payment Date shall fall on the Maturity Date.
Coupon Accrual
Each Bond will cease to bear coupon from and including the Maturity Date, as defined in the
discussion on “Final Redemption”, below, unless, upon due presentation, payment of the principal in
12
respect of the Bond then outstanding is not made, is improperly withheld or refused, in which case the
Penalty Interest (see “Penalty Interest’), below, will apply.
Determination of Rate of Coupon
The coupon shall be calculated on the basis of a 360-day year consisting of 12 months of 30 days
each and, in the case of an incomplete month, the number of days elapsed on the basis of a month of
30 days. For purposes of clarity, the coupon payable on the first Coupon Payment Date shall be
calculated for a period of 91 days on the basis of a 360-day year.
REDEMPTION AND PURCHASE
Final Redemption
Unless previously purchased and cancelled, the Bonds will be redeemed at par or one hundred
percent (100%) of face value on November 22, 2012 (the “Maturity Date”). However, payment of all
amounts due on such date may be made by the Issuer through the Paying Agent, without adjustment,
on the succeeding Business Day if the Maturity Date is not a Business Day.
Redemption for Taxation Reasons
If payments under the Bonds become subject to additional or increased taxes other than the taxes
and rates of such taxes prevailing on the Issue Date as a result of certain changes in law, rule or
regulation, or in the interpretation thereof, and such additional or increased rate of such tax cannot be
avoided by use of reasonable measures available to the Issuer, the Issuer may redeem the Bonds in
whole, but not in part, on any Coupon Payment Date (having given not more than 60 nor less than 30
days’ notice to the Trustee) at par plus accrued coupon.
Optional Redemption
Prior to final maturity, the Issuer may redeem in whole and not a part only of the relevant outstanding
Bonds on the twelfth (12th) and sixteenth (16th) Coupon Payment Dates (the "Optional Redemption
Dates").
The Issuer shall give not less than thirty (30) or more than sixty (60) days prior written notice of its
intention to redeem the Bonds, which notice shall be irrevocable and binding upon the Issuer to effect
such early redemption of the Bonds at the Coupon Payment Date stated in such notice (the “Early
Redemption Date”).
The Bonds shall be redeemed by payment of the Issue Price in cash plus all accrued and unpaid
interest based on the Coupon Rate, plus an early redemption penalty (except in case of Change of
Law (see “Change in Law or Circumstance”, below) based on the Issue Price in accordance with the
following schedule:
Optional Redemption Date
th)
Twelfth (12
Prepayment Penalty
Coupon Payment Date...................
0.75%
th
0.50%
Sixteenth (16 ) Coupon Payment Date...............
13
Change in Law or Circumstance
The following events shall be considered as changes in law or circumstances (“Change of Law”) as it
refers to the obligations of the Issuer and to the rights and interests of the Bondholders under the
Trust Indenture and the Bonds:
(a)
Any government and/or non-government consent, license, authorization, registration or
approval now or hereafter necessary to enable the Issuer to comply with its obligations under
the Trust Indenture or the Bonds shall be modified in a manner which, in the reasonable
opinion of the Trustee, will materially and adversely affect the ability of the Issuer to comply
with such obligations, or shall be withdrawn or withheld;
(b)
Any provision of the Trust Indenture or any of the related documents is or becomes, for any
reason, invalid, illegal or unenforceable to the extent that it becomes for any reason unlawful
for the Issuer to give effect to its rights or obligations hereunder, or to enforce any provisions
of the Trust Indenture or any of the related documents in whole or in part, or any law is
introduced to prevent or restrain the performance by the parties hereto of their obligations
under the Trust Indenture or any other related documents; and
(c)
Any concessions, permits, rights, franchise or privileges required for the conduct of the
business and operations of the Issuer shall be revoked, canceled or otherwise terminated, or
the free and continued use and exercise thereof shall be curtailed or prevented, in such
manner as to materially and adversely affect the financial condition or operations of the
Issuer.
Payments
The principal of, coupon on, and all other amounts payable on the Bonds will be payable to the
Bondholders through checks issued by the Paying Agent and, at the option of the Bondholder, either:
(a) made available for pick-up by such Bondholder or its duly authorized representative at the office of
th
the Paying Agent at 16 Floor BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City; or (b)
delivered via registered mail, at the Bondholder’s risk, to the addresses of the Bondholders appearing
in the Register of Bondholders. Bondholders claiming checks from the Paying Agent will be required
to present proof of identification documents and or Bondholder representatives will be required to
present written authority from the relevant Bondholder, in form and substance acceptable to the
Paying Agent. The principal of, and coupon on, the Bonds will be payable in Philippine Pesos. The
Issuer will ensure that so long as any of the Bonds remains outstanding, there shall at all times be a
Paying Agent for the purposes of the Bonds and the Issuer may terminate the appointment of the
Paying Agent, subject as provided in the Paying Agency and Registry Agreement. In the event of the
appointed office of any bank being unable or unwilling to continue to act as the Paying Agent, the
Issuer shall appoint the Makati City office of such other leading bank in the Philippines to act in its
place. The Paying Agent may not resign its duties or be removed without a successor having been
appointed.
Payment of Additional Amounts; Taxation
Interest income and the prepayment penalty on the Bonds are subject to a final withholding tax at
rates of between 20% and 35% depending on the tax status of the relevant Bondholder under
relevant law, regulation or tax treaty. Except for such final withholding tax and as otherwise provided,
all payments of principal and interest to be made free and clear of any deductions or withholding for
or on account of any present or future taxes or duties imposed by or on behalf of Republic of the
Philippines, including but not limited to, issue, registration or any similar tax or other taxes and duties,
including interest and penalties. If such taxes or duties are imposed, the same shall be for the
account of the Issuer. Provided, however, that the Issuer shall not be liable for:
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(a)
the applicable final withholding tax applicable on interest earned on the Bonds prescribed
under the National Internal Revenue Code of 1997, as amended and its implementing rules
and regulations as may be in effect from time to time, (the “Tax Code”). An investor who is
exempt from the aforesaid withholding tax, or is subject to a preferential withholding tax rate
shall be required to submit the following requirements to the Registrar, subject to acceptance
by the Issuer as being sufficient in form and substance: (i) certified true copy of the tax
exemption certificate, ruling or opinion issued by the Bureau of Internal Revenue confirming
the exemption or preferential rate; (ii) a duly notarized undertaking, in the prescribed form,
declaring and warranting its tax exempt status or preferential rate entitlement, undertaking to
immediately notify the Issuer of any suspension or revocation of the tax exemption
certificates or preferential rate entitlement, and agreeing to indemnify and hold the Issuer and
the Registrar free and harmless against any claims, actions, suits, and liabilities resulting
from the non-withholding of the required tax; and (iii) such other documentary requirements
as may be required under the applicable regulations of the relevant taxing or other authorities
which for purposes of claiming tax treaty withholding rate benefits, shall include evidence of
the applicability of a tax treaty and consularized proof of the Bondholder’s legal domicile in
the relevant treaty state, and confirmation acceptable to the Issuer that the Bondholder is not
doing business in the Philippines, provided further, that all sums payable by the Issuer to tax
exempt entities shall be paid in full without deductions for taxes, duties assessments or
government charges subject to the submission by the Bondholder claiming the benefit of any
exemption of reasonable evidence of such exemption to the Registrar;
(b)
Gross Receipts Tax under Section 121 of the Tax Code;
(c)
taxes on the overall income of any securities dealer or Bondholder, whether or not subject to
withholding; and
(d)
Value Added Tax (“VAT”) under Sections 106 to 108 of the Tax Code, and as amended by
Republic Act (R.A.) No. 9337. Documentary stamp tax for the primary issue of the Bonds
and the execution of the Bond Agreements, if any, shall be for the Issuer’s account.
NEGATIVE PLEDGE
For as long as any of the Bonds remain outstanding, the Issuer covenants that the Issuer shall not,
without the prior written consent of the Bondholders holding more than fifty percent (50%) of the
principal amount of the Bonds then outstanding (the “Majority Bondholders”), permit any
indebtedness for borrowed money to be secured by or to benefit from Security in favor of any creditor
or class of creditors without providing the Bondholders with the same kind or class of Security, the
benefit of which is extended equally and ratably among them to secure the Bonds; provided however
that, this restriction shall not prohibit:
(a)
Any Security over any asset to secure: (i) payment of the purchase price or cost of leasehold
rights of such asset; or (ii) the payment of the cost and expenses for the development of such
asset pursuant to any development made or being made by the Issuer in the ordinary course
of business; or (iii) the payment of any indebtedness in respect of borrowed money (including
extensions and renewals thereof and replacements therefor) incurred for the purpose of
financing the purchase, lease or development of such asset;
(b)
Any Security constituted for any obligation or credit facility incurred for the purpose of
pursuing any infrastructure project or investment therein, whether such infrastructure project
is undertaken by the Issuer itself, by its Affiliates, and/or by the Issuer or its Affiliates with
third parties, and whether the same is carried on separately from or integrated with any of the
Issuer’s real estate development, or any Security constituted by the Issuer on its right to
receive income or revenues (whether in the form of dividends or otherwise) from
infrastructure projects or related investments therein;
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(c)
Any Security created for the purpose of paying current Taxes, assessments or other
governmental charges which are not delinquent or remain payable without any penalty; or the
validity of which is contested in good faith by appropriate proceedings upon stay of execution
of the enforcement thereof and adequate reserves having been provided for the payment
thereof;
(d)
Any Security to secure, in the normal course of the business of the Issuer or its Affiliates: (i)
statutory or regulatory obligations; (ii) surety or appeal bonds; (iii) bonds for release of
attachment, stay of execution or injunction; or (iv) performance of bids, tenders, contracts
(other than for the repayment of borrowed money) or leases;
(e)
Any Security: (i) imposed by law, such as carrier’s, warehousemen’s and mechanics’ liens
and other similar liens arising in the ordinary course of business and not material in amount;
(ii) arising out of pledge or deposits under the workmen’s compensation laws, unemployment
insurance, old age pensions or other social security or retirement benefits or similar
legislation; and (iii) arising out of set-off provisions in the normal course of its financing
arrangements; provided that the Bondholders hereunder shall also have to the extent
permitted by applicable Law, and upon notice to the Issuer, a similar right of set- off;
(f)
Any Security in favor of banks, insurance companies, other financial institutions and
Philippine government agencies, departments, authorities, corporations or other juridical
entities, which secure a preferential financing obtained by the Issuer under a governmental
program, and which cover assets of the Issuer which have an aggregate appraised value,
determined in accordance with generally accepted appraisal principles and practices
consistently applied not exceeding Eight Billion Philippine Pesos (P 8,000,000,000.00);
(g)
Any Security existing on the date of the Trust Indenture which is disclosed in writing by the
Issuer to the Trustee prior to the execution of the Trust Indenture;
(h)
Any Security established in favor of insurance companies and other financial institutions in
compliance with the applicable requirements of the Office of the Insurance Commission on
admitted assets or the requirements of the BSP on loans and financial accommodations
extended to directors, officers, stockholders and related interest (DOSRI);
(i)
Any Security to be constituted on the assets of the Issuer after the date of the Trust Indenture
which is disclosed in writing by the Issuer to the Trustee prior to the execution of the Trust
Indenture or any Security for an aggregate loan accommodation not exceeding the equivalent
of ten percent (10%) of the market value of the consolidated assets of the Issuer as reflected
in the latest appraisal report submitted by an independent and reputable appraiser;
(j)
Any Security constituted over the investment of the Issuer in any of its Affiliates, to guarantee
or secure the obligations of said Affiliates;
(k)
Any Security constituted for the purpose of guaranteeing an Affiliate’s obligation in connection
with any contract or agreement (other than for borrowed money);
(l)
Any title transfer or retention of title arrangement entered into by the Issuer in the normal
course of its trading activities on the counterparty’s standard or usual terms; or
(m)
Any Security created over (i) deposits made by the Issuer with the proceeds of any loan
facility made to it by any bank or financial institution denominated in a currency (“foreign
currency”) other than Philippine Pesos; or (ii) financial instruments denominated in a foreign
currency owned by the Issuer, in each case solely for the purpose of securing loan facilities
denominated in Philippine Pesos granted to the Issuer in an aggregate equivalent principal
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amount not exceeding the amount of the deposit or the face amount (or value) of that
financial instrument. (each a “Permitted Lien,” and together “Permitted Liens”); or
(n)
Any Security created over cash deposits or marketable investment securities in favor of a
bank or financial institution to secure any borrowed money in connection with a treasury
transaction, provided that the aggregate amount of security does not at any time exceed
US$30,000,000 or its equivalent. For this purpose, a “treasury transaction” means any
currency, commodity, or interest rate purchase, cap or collar agreement, forward rate
agreement, future or option contract, swap or other similar agreement, in relation to the
Issuer’s treasury management.
EVENTS OF DEFAULT
The Issuer shall be considered in default under the Bonds and the Trust Indenture in case any of the
following events (each an “Event of Default”) shall occur and is continuing:
(a)
Payment Default
The Issuer fails to pay when due and payable any amount which the Issuer is obliged to pay
to the Bondholders under the Trust Indenture and the Bonds.
(b)
Representation/Warranty Default
Any representation and warranty of the Issuer hereof or any certificate or opinion submitted
pursuant hereto proves to have been untrue, incorrect or misleading in any material respect
as and when made and the circumstances which cause such representation or warranty to be
incorrect or misleading continue for not less than fourteen (14) days (or such longer period as
the Majority Bondholders shall approve) after receipt of written notice from the Bondholders
to that effect.
(c)
Other Default
The Issuer fails to perform or violates any other provisions of the Trust Indenture and the
Bonds, and such failure or violation is not remediable or, if remediable, continues to be
unremedied after the applicable grace period, or in the absence of such grace period, after
thirty (30) days from the date of occurrence of the said violation with respect to the covenant
to maintain the prescribed financial ratios, (particularly a maximum debt to equity ratio of 3.0
: 1.0; and a minimum current ratio of 0.5 : 1.0); provided that the Events of Default
constituting a payment default or closure default shall not be remediable.
(d)
Cross Default
The Issuer violates any term or condition of any contract executed by the Issuer with any
bank, financial institution or other person, corporation or entity for the payment of borrowed
money which constitutes an event of default under said contract, or in general, violation of
any, law or regulation which violation, if remediable, is not remedied by the Issuer within ten
(10) Business Days from receipt of notice by the Trustee to the Issuer, or which violation is
otherwise not contested by the Issuer, and the effect of such violation results in the
acceleration or declaration of the whole financial obligation to be due and payable prior to the
stated normal date of maturity; and which violation will, further, in the reasonable opinion of
the Trustee, adversely and materially affect the performance by the Issuer of its obligations
under the Trust Indenture and the Bonds. Provided, however, that no event of default will
occur under this paragraph unless the aggregate amount of indebtedness in respect of which
one or more of the events above mentioned has/have occurred equals or exceeds US$10
Million ($10,000,000.00) or its Peso equivalent.
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(e)
Expropriation Default
The Republic of the Philippines or any competent authority thereof takes any action to
suspend the whole or the substantial portion of the operations of the Issuer and to condemn,
seize, nationalize or appropriate (either with or without compensation) the Issuer or any
material portion of its properties or assets, unless such act, deed or proceedings are
contested in good faith by the Issuer.
(f)
Insolvency Default
There is an act of Bankruptcy vis-a-vis the Issuer and the relevant proceedings, to the extent
not initiated by the Issuer, shall not have been reversed or stayed within a period of sixty (60)
days or such longer period as the Issuer satisfies the Bondholders is appropriate under the
circumstances.
(g)
Judgment Default
Any final judgment, decree or arbitral award for the sum of money, damages or for a fine or
penalty in excess of Five Hundred Million Pesos (P500,000,000.00) or its equivalent in any
other currency is entered against the Issuer and the enforcement of which is not stayed, and
is not paid, discharged or duly bonded within thirty (30) calendar days after the date when
payment of such judgment, decree or award is due under the applicable law or agreement.
(h)
Writ and Similar Process Default
Any judgment, writ, warrant of attachment, injunction, stay order, execution or similar process
shall be issued or levied against any material part of the Issuer’s assets, business or
operations and such judgment, writ, warrant or similar process shall not be released, vacated
or fully bonded within thirty calendar (30) days after its issue or levy.
(i)
Closure Default
The Issuer voluntarily suspends or ceases operations of a substantial portion of its business
for a continuous period of thirty (30) calendar days except in the case of strikes or lockouts or
when necessary to prevent business losses or when due to fortuitous events or force
majeure.
(j)
Material Adverse Change
There occurs any event or circumstance which, in the reasonable opinion of the Majority
Bondholders, would result in a material adverse change or have a material adverse effect on:
(i) the business, operations, financial condition or business prospects of the Issuer taken as
a whole;
(ii) the ability of the Issuer to perform any of its obligations under the Trust Indenture and the
Bonds; or
(iii) the validity, legality or enforceability of the Trust Indenture or the Bonds.
CONSEQUENCES OF DEFAULT
(a)
If any one or more of the Events of Default shall have occurred and be continuing, the
Trustee upon the written direction of the Majority Bondholders, by notice in writing delivered
to the Issuer, or if by the Majority Bondholders, by notice in writing delivered to the Issuer and
the Trustee, may declare all amounts due, including the principal of the Bonds, all accrued
coupon and other charges thereon, if any, to be immediately due and payable, and upon
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such declaration the same shall be immediately due and payable, anything contained in the
Trust Indenture or in the Bonds to the contrary notwithstanding.
(b)
This provision, however, is subject to the condition that, except in the case of a Writ and
Similar Process Default (which is specified as such in the “Description of the Bonds’), the
Majority Bondholders, by written notice to the Issuer and the Trustee may, during the
prescribed curing period, if any, rescind and annul such declaration made by the Trustee
pursuant to a consequence of default (see “Consequences of Default”), and the
consequences of such declaration, upon such terms, conditions and agreement, if any, as
they may determine; provided that, no such rescission and annulment shall extend to or shall
affect any subsequent default or shall impair any right consequent thereon.
(c)
At any time after any Event of Default shall have occurred, the Trustee may:
i.
ii.
by notice in writing to the Issuer, the Paying Agent and the Registrar, require the Paying
Agent and the Registrar to:
(aa)
act thereafter as agents of the Bondholders represented by the Trustee on the
terms provided in the Paying Agency and Registry Agreement (with
consequential amendments as necessary and save that the Trustee’s liability
under any provisions thereof for the indemnification, remuneration and payment
of out-of-pocket expenses of the Paying Agent and the Registrar shall be limited
to amounts for the time being held by the Trustee on the trusts of the Trust
Indenture in relation to the Bonds and available to the Trustee for such purpose)
and thereafter to hold all sums, documents and records held by them in respect
of the Bonds on behalf of the Trustee; and/or
(bb)
deliver up all evidence of the Bonds and all sums, documents and records held
by them in respect of the Bonds to the Trustee or as the Trustee shall direct in
such notice; provided, that, such notice shall be deemed not to apply to any
document or record which the Paying Agent or Registrar is not obliged to release
by any law or regulation; and
by notice in writing to the Issuer require the Issuer to make all subsequent payments in
respect of the Bonds to the order of the Trustee and-- with effect from the issue of any
such notice until such notice is withdrawn-- proviso (aa) above and the Issuer’s positive
covenant to pay principal and coupon on the Bonds, more particularly set forth in Section
4.1(a) of the Trust Indenture, shall cease to have effect.
In case any amount payable by the Issuer under the Bonds, whether for principal, coupon
or otherwise, is not paid on due date, the Issuer shall, without prejudice to its obligations
to pay the said principal, coupon and other amounts, pay Penalty Interest on the
defaulted amount(s) from the time the amount falls due until it is fully paid.
(d)
If any one or more of the events enumerated as a Change of Law in the discussion on
“Change in Law or Circumstance” above, shall occur and be continuing for a period of fifteen
(1 5) Business Days with respect to the events contemplated in (i) or (ii) of Condition 5(d),
above and for a period of thirty (30) Business Days with respect to the events contemplated
in (iii) of the discussion on “Change in Law or Circumstance”, above, the Majority
Bondholders, by notice in writing delivered to the Issuer through the Trustee, after the lapse
of the said fifteen (15) or thirty (30) Business Day period, may declare the principal of the
Bonds, including all accrued coupon and other charges thereon, if any, to be immediately due
and payable, and upon such declaration the same shall be immediately due and payable
without any pre-payment penalty under as an optional redemption (see “Optional
Redemption”), anything in the Trust Indenture or in the Bonds contained to the contrary
notwithstanding, subject to the notice requirements under the discussion on “Notice of
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Default”, below. Provided that such notice shall not be deemed either caused by a default
under the discussion on “Events of Default”, above; or a notice of default under the
discussion on “Notice of Default”, below.
Notice of Default
The Trustee shall, within five (5) days after the occurrence of any Event of Default, give to the
Bondholders written notice of such default known to it via publication in a newspaper of general
circulation in Metro Manila for two (2) consecutive days as soon as practicable, indicating in the
published notice that an Event of Default has occurred, unless the same shall have been cured
before the giving of such notice.
Penalty Interest
Upon the occurrence and during the continuance of any Event of Default, the Issuer shall pay interest
on all amounts then due under and owing to the Bondholder under the Trust Indenture and the
Bonds, including but not limited to the unpaid principal amount and any coupon thereon, at a rate
equal at all times to six percent (6%) per annum above, and in addition to, the Coupon Rate,
computed on the actual number of days from and including the date on which the said amount/s
became due until full payment thereof on a year of 360 days.
Payment in the Event of Default
The Issuer covenants that upon the occurrence of any Event of Default, the Issuer will pay to the
Bondholders, through the Paying Agent, the whole amount which shall then have become due and
payable on all such outstanding Bonds with coupon at the rate borne by the Bonds on the overdue
principal and with Penalty Interest as described above, and in addition thereto, the Issuer will pay to
the Trustee such further amounts as shall be determined by the Trustee to be sufficient to cover the
cost and expenses of collection, including reasonable compensation to the Trustee, its agents,
attorneys and counsel, and any reasonable expenses or liabilities incurred without negligence or bad
faith by the Trustee hereunder.
Upon the occurrence of an Event of Default under as discussed in “Events of Default”, above,
Bondholders shall have the right, but not the obligation, to require the Issuer to redeem the Bonds in
full, by payment of the amounts stated above, plus the principal amount, by delivery of the relevant
evidence of the bonds to the Trustee.
Application of Payments
Any money collected or delivered to the Paying Agent as a Consequence of Default, and any other
funds held by it, subject to any other provision of the Trust Indenture and the Paying Agency and
Registry Agreement relating to the disposition of such money and funds, shall be applied by the
Paying Agent in the order of preference as follows: first, to the payment to the Trustee, the Paying
Agent and the Registrar, of the costs, expenses, fees and other charges of collection, including
reasonable compensation to them, their agents, attorneys and counsel, and all reasonable expenses
and liabilities incurred or disbursements made by them, without negligence or bad faith; second, to
the payment of the interest in default, in the order of the maturity of such coupon with Penalty
Interest; third, to the payment of the whole amount then due and unpaid upon the Bonds for principal,
and interest; and fourth, the remainder, if any shall be paid to the Issuer, its successors or assigns, or
to whoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may
direct.
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Prescription
Claims in respect of principal and coupon or other sums payable hereunder will be prescribed unless
made within ten (10) years (in the case of principal or other sums) or five (5) years (in the case of
interest) from the date on which payment becomes due.
Remedies
All remedies conferred by the Trust Indenture to the Trustee and the Bondholders shall be cumulative
and not exclusive and shall not be so construed as to deprive the Trustee or the Bondholders of any
legal remedy by judicial or extra judicial proceedings appropriate to enforce the conditions and
covenants of the Trust Indenture, subject to the discussion below on “Ability to File Suit”.
No delay or omission by the Trustee or the Bondholders to exercise any right or power arising from or
on account of any default hereunder shall impair any such right or power, or shall be construed to be
a waiver of any such default or an acquiescence thereto; and every power and remedy given by the
Trust Indenture to the Trustee or the Bondholders may be exercised from time to time and as often as
may be necessary or expedient.
Ability to File Suit
No Bondholder shall have any right by virtue of or by availing of any provision of the Trust Indenture
to institute any suit, action or proceeding for the collection of any sum due from the Issuer hereunder
on account of principal, interest and other charges, or for the appointment of a receiver or trustee, or
for any other remedy hereunder unless (i) such Bondholder previously shall have given to the Trustee
written notice of an Event of Default and of the continuance thereof and the related request for the
Trustee to convene a meeting of the Bondholders to take up matters related to their rights and
interests under the Bonds; (ii) the Majority Bondholders shall have decided and made the written
request upon the Trustee to institute such action, suit or proceeding in its own name; (iii) the Trustee
for sixty (60) days after the receipt of such notice and request shall have neglected or refused to
institute any such action, suit or proceeding and (iv) no directions inconsistent with such written
request shall have been given under a waiver of default by the Bondholders, it being understood and
intended, and being expressly covenanted by every Bondholder with every other Bondholder and the
Trustee, that no one or more Bondholders shall have any right in any manner whatever by virtue of or
by availing of any provision of the Trust Indenture to affect, disturb or prejudice the rights of the
holders of any other such Bonds or to obtain or seek to obtain priority over or preference to any other
such holder or to enforce any right under the Trust Indenture, except in the manner herein provided
and for the equal, ratable and common benefit of all the Bondholders.
Waiver of Default by the Bondholders
The Majority Bondholders may direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred upon the Trustee, or
may on behalf of the Bondholders waive any past default except the events of default defined as a
payment default, breach of representation or warranty default, expropriation default, insolvency
default, or closure default, and its consequences. In case of any such waiver, the Issuer, the Trustee
and the Bondholders shall be restored to their former positions and rights hereunder; but no such
waiver shall extend to any subsequent or other default or impair any right consequent thereto. Any
such waiver by the Majority Bondholders shall be conclusive and binding upon all Bondholders and
upon all future holders and owners thereof, irrespective of whether or not any notation of such waiver
is made upon the certificate representing the Bonds.
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MEETINGS OF THE BONDHOLDERS
A meeting of the Bondholders may be called at any time and from time to time for the purpose of
taking any actions authorized to be taken by or on behalf of the Bondholders of any specified
aggregate principal amount of Bonds under any other provisions of the Trust Indenture or under the
law and such other matters related to the rights and interests of the Bondholders under the Bonds.
Notice of Meetings
The Trustee may at any time call a meeting of the Bondholders, or the holders of at least twenty- five
percent (25.0%) of the aggregate outstanding principal amount of Bonds may direct the Trustee to
call a meeting of the Bondholders, to take up any allowed action, to be held at such time and at such
place as the Trustee shall determine. Notice of every meeting of the Bondholders, setting forth the
time and the place of such meeting and the purpose of such meeting in reasonable detail, shall be
sent by the Trustee to the Issuer and to each of the registered Bondholders not earlier than fifteen
(15) days nor later than forty five (45) days prior to the date fixed for the meeting. All reasonable costs
and expenses incurred by the Trustee for the proper dissemination of the requested meeting shall be
reimbursed by the Issuer within ten (10) days from receipt of the duly supported billing statement.
Failure of the Trustee to Call a Meeting
In case at any time the Issuer, pursuant to a resolution of its board of directors or executive
committee, or the holders of at least twenty-five percent (25.0%) of the aggregate outstanding
principal amount of the Bonds shall have requested the Trustee to call a meeting of the Bondholders
by written request setting forth in reasonable detail the purpose of the meeting, and the Trustee shall
not have mailed and published, in accordance with the notice requirements, the notice of such
meeting within twenty (20) days after receipt of such request, then the Issuer or the Bondholders in
the amount above specified may determine the time and place for such meeting and may call such
meeting by mailing and publishing notice thereof.
Quorum
The presence of the Majority Bondholders, personally or by proxy, shall be necessary to constitute a
quorum to do business at any meeting of the Bondholders.
Procedure for Meetings
(i)
The Trustee shall preside at all the meetings of the Bondholders unless the meeting shall
have been called by the Issuer or by the Bondholders, in which case the Issuer or the
Bondholders calling the meeting, as the case may be, shall in like manner move for the
election of the chairman and secretary of the meeting.
(ii)
Any meeting of the Bondholders duly called may be adjourned from time to time for a period
or periods not to exceed in the aggregate of one (1) year from the date for which the meeting
shall originally have been called and the meeting as so adjourned may be held without further
notice. Any such adjournment may be ordered by persons representing a majority of the
aggregate principal amount of the Bonds represented at the meeting and entitled to vote,
whether or not a quorum shall be present at the meeting.
Voting Rights
To be entitled to vote at any meeting of the Bondholders, a person shall be a registered holder of one
or more Bonds or a person appointed by an instrument in writing as proxy by any such holder as of
the date of the said meeting. The only persons who shall be entitled to be present or to speak at any
22
meeting of the Bondholders shall be the persons entitled to vote at such meeting and any
representatives of the Issuer and its legal counsel.
Voting Requirement
All matters presented for resolution by the Bondholders in a meeting duly called for the purpose shall
be decided or approved by the affirmative vote of the Majority Bondholders present or represented in
a meeting at which there is a quorum except as otherwise provided in the Trust Indenture. Any
resolution of the Bondholders which has been duly approved with the required number of votes of the
Bondholders as herein provided shall be binding upon all the Bondholders and the Issuer as if the
votes were unanimous.
Role of the Trustee in Meetings of the Bondholders
Notwithstanding any other provisions of the Trust Indenture, the Trustee may make such reasonable
regulations as it may deem advisable for any meeting of the Bondholders, in regard to proof of
ownership of the Bonds, the appointment of proxies by registered holders of the Bonds, the election
of the chairman and the secretary, the appointment and duties of inspectors of votes, the submission
and examination of proxies, certificates and other evidences of the right to vote and such other
matters concerning the conduct of the meeting as it shall deem fit.
Evidence Supporting the Action of the Bondholders
Wherever in the Trust Indenture it is provided that the holders of a specified percentage of the
aggregate outstanding principal amount of the Bonds may take any action (including the making of
any demand or requests, the giving of any notice or consent or the taking of any other action), the fact
that at the time of taking any such action the holders of such specified percentage have joined therein
may be evidenced by: (i) any instrument executed by the Bondholders in person or by the agent or
proxy appointed in writing or (ii) the duly authenticated record of voting in favor thereof at the meeting
of the Bondholders duly called and held in accordance herewith or (iii) a combination of such
instrument and any such record of meeting of the Bondholders.
NOTICES TO THE BONDHOLDERS
Notices to Bondholders shall be sent to their mailing address as set forth in the Register of
Bondholders when required to be made through registered mail, surface mail or personal delivery.
Except where a specific mode of notification is provided for herein, notices to Bondholders shall be
sufficient when made in writing and transmitted in any one of the following modes: (i) registered mail;
(ii) surface mail; (iii) by one-time publication in a newspaper of general circulation in the Philippines;
(iv) personal delivery to the address of record in the Register of Bondholders or (v) disclosure through
the Online Disclosure System of the Philippine Stock Exchange. The Trustee shall rely on the
Register of Bondholders in determining the Bondholders entitled to notice. All notices shall be
deemed to have been received (i) ten (10) days from posting if transmitted by registered mail; (ii)
fifteen (15) days from mailing, if transmitted by surface mail; (iii) on date of publication; (iv) on date of
delivery, by personal delivery; or (v) on the date that the disclosure is uploaded on the website of the
Philippine Stock Exchange.
A notice to the Trustee is notice to the Bondholders. The publication in a newspaper of general
circulation in the Philippines of a press release or news item about a communication or disclosure
made by the Issuer to the Securities and Exchange Commission or the Philippine Stock Exchange on
a matter relating to the Bonds shall be deemed a notice to the Bondholders of said matter on the date
of the first publication.
23
GOVERNING LAW
The Bond Agreements are governed by and are construed in accordance with Philippine law.
CERTAIN DEFINED TERMS
The following sets forth the respective definitions of certain terms used in this Description of the
Bonds as such terms are defined in the Trust Indenture. Except as otherwise provided and where
context indicates otherwise, defined terms in this Description of the Bonds have the meanings
ascribed to them in the Trust Indenture.
(a)
Affiliate means any corporation, directly or indirectly controlled by the Issuer, whether by way
of ownership of at least twenty percent (20%) of the total issued and outstanding capital stock
of such corporation, or the right to elect at least twenty percent (20%) of the number of
directors in such corporation, or the right to control the operation and management of such
corporation by reason of contract or authority granted by said corporation to the Issuer.
(b)
Bankruptcy means, with respect to a Person, (a) that such Person has (i) made an
assignment for the benefit of creditors; (ii) filed a voluntary petition in bankruptcy; (iii) been
adjudged bankrupt, or insolvent; or had entered against such Person an order of relief in any
bankruptcy or insolvency proceeding; (iv) filed a petition or an answer seeking for such
Person any reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law or regulation or filed an answer or other pleading
admitting or failing to contest the material allegations of a petition filed against such Person in
any proceeding of such nature; or (v) sought, consented to, or acquiesced in the appointment
of a trustee, receiver or liquidator of such Person or of all or any substantial part of such
Person’s properties; (b) 60 days have elapsed after the commencement of any proceeding
against such Person seeking reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any statute, law or regulation and such
proceeding has not been dismissed; or (c) 60 days have elapsed since the appointment
without such Person’s consent or acquiescence of a trustee, receiver or liquidator of such
Person or of all or any substantial part of such Person’s properties and such appointment has
not been vacated or stayed or the appointment is not vacated within 60 days after the
expiration of such stay.
(c)
Majority Bondholders means the holders of more than fifty percent (50%) in principal
amount, of the Bonds then outstanding.
(d)
Security means any mortgage, pledge, lien or encumbrance constituted on any of the
Issuer’s properties, for the purpose of securing its or its Affiliates’ obligation.
24
RISK FACTORS
The price of the securities can and does fluctuate, and any individual security may experience upward or
downward movements, and may even become valueless. There is an inherent risk that losses may be incurred
rather than profit made as a result of buying and selling securities. Past performance is not a guide to future
performance and there may be a large difference between the price and the selling price of these securities.
Investors deal with a range of investments, each of which may carry a different level of risk. Investors should
carefully consider all the information contained in this Prospectus, including the risk factors described below
before deciding to invest in the Bonds.
This section entitled “Risk Factors” does not purpose to disclose all the risks and other significant aspects of
investing in these securities. Investors should undertake independent research and study the trading of these
securities before commencing any trading activity. Investors should seek professional advice regarding any
aspect of the securities such as the nature of risks involved in the trading of securities, and specifically those of
high risk securities. Investors may request publicly available information on the Bonds and the Company from
the Philippine SEC.
The means by which Ayala aims to address the risk factors discussed herein are principally presented in the
sections of this Prospectus entitled – “Business” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”.
This Prospectus contains forward-looking statements that involve risks and uncertainties. Ayala applies
conservative financial and operational controls in the management of its business risks, as confirmed by
PhilRatings.
Organizationally, it is the lead directors/company presidents/chief risk officers who have ultimate accountability
and responsibility to ensure risk management initiatives at subsidiaries are aligned with Ayala Corporation and
are responsible for submission of risk reports to ensure key risks are well-understood, assessed/measured and
reported. Providing support are the internal audit units who regularly process audits and process improvements.
The Audit Committee of the Board meets regularly and performs its oversight role in managing the risks involved
in the operations of Ayala
RISKS ASSOCIATED WITH THE PHILIPPINES
Ayala’s businesses will be influenced by the general political and economic situation of the
Philippines. Any political and/or economic instability in the future may have a negative effect on
Ayala’s financial condition and result of operations.
Political Considerations
The Philippines has from time to time experienced political and military instability. In 2001, former
President Joseph Estrada was removed from office following a series of events which started in late
2000 involving allegations of corruption, impeachment proceedings, mass action protests and finally,
the withdrawal of support by the military. Then Vice President Gloria Macapagal Arroyo was installed
as President of the Philippines on January 20, 2001.
National and local elections were held on May 10, 2004, which included the election of the President
and Vice President. The race for President and Vice President was closely contested between the
incumbent administration standard bearers President Arroyo and Senator Noli De Castro, and the
leading opposition party candidates Fernando Poe, Jr. and Senator Loren Legarda. Allegations of
election-related irregularities led to several mass action protests organized by losing opposition
candidates. Notwithstanding the protest rallies and several disqualification cases filed against
President Arroyo (none of which prospered), on June 24, 2004 President Arroyo and Senator De
Castro were proclaimed by Congress as President and Vice President, respectively.
25
Risk Factors
In 2005, President Arroyo was alleged to have committed fraud in the 2004 elections based on taped
conversations she supposedly had with an official of the Commission on Elections (“Comelec”). After
President Arroyo admitted to speaking with a Comelec official, several cabinet members resigned
from their posts and, along with opposition groups, called for her resignation. Impeachment
complaints were then filed against President Arroyo, but the House of Representatives eventually
voted to reject the impeachment complaints.
In February 2006, the Government thwarted an alleged coup plot involving certain military rebels and
communists. Citing a supposed tactical alliance between right- and left-wing enemies of the state
and a conspiracy over broad front to topple the Government, President Arroyo put the country under
a state of emergency, raising furor from various sectors of society, including the Roman Catholic
Church. After a week, President Arroyo lifted the state of emergency as the national security situation
normalized.
Several armed groups are active in the Philippines which, from time to time, engage in various
criminal activities including armed conflict with the military and Government, bombings, political
assassinations, and kidnappings. These armed elements include ideologically motivated groups such
as the Muslim extremist Abu Sayyaf group, and the communist New People’s Army.
The Arroyo administration is pushing for changes to the Philippine Constitution which will allow,
among others, a change in the form of government from presidential to parliamentary. As such, there
can be no assurance that the political climate will remain stable and that current or future
Governments will adopt economic policies that will result in sustained economic growth.
Economic Considerations
In the past, the Philippines has experienced periods of slow or negative growth, high inflation,
significant depreciation of the Philippine peso and electricity shortages. The regional Asian financial
crisis in 1997 also affected the Philippine economy resulting in, among others, the depreciation of the
Philippine peso, higher interest rates, slower growth and a reduction in the country’s credit ratings.
These affected the ability of a number of Philippine companies to meet their debt servicing
obligations. While the Philippine economy registered economic growth since the Asian financial crisis,
the economy faced significant challenges such as a ballooning budget deficit, volatile exchange rates
and a relatively weak banking sector. Overall public sector performance also remained mixed, with
the government encumbered with sizable guaranteed and non-guaranteed contingent liabilities that
complicate fiscal prospects.
Despite entrenched special interests, Government managed to address certain challenges. In
November 2005, a new VAT law took effect, expanding VAT coverage to previously exempt products
and services; and in February 2006, the Government increased the VAT rate to 12% from 10%.
These tax changes helped to raise revenue collections by around P162 billion in 2006.
The Government has been successful thus far in reducing its budget deficit. With tighter spending
and improved revenue collection, the budget deficit in 2006 was P62.2 billion, lower than the P124.9
billion program for the year. The Government projects the budget deficit to reach P63.0 billion in
2007. In July 2007, it achieved a budget surplus of P1.6 billion and incurred a P39.4 billion deficit
year-to-date, keeping it on track to meet its target for the year.
Real gross domestic product (“GDP”) rose by 5.4% in 2006, versus the 5.1% growth registered in
2005. For the first half of 2007, GDP growth reached 7.3% due to the robust performance of the
industrial and services sectors.
26
Risk Factors
Fitch Ratings (“Fitch”) has assigned a long-term foreign currency debt rating to the Philippines of “BB”
(two notches below investment grade), while Standard & Poor’s (“S&P”) has assigned a “BB-“ (three
notches below investment grade) rating and Moody’s Investors Service (“Moody’s”) has assigned
“B1” (four notches below investment grade) rating to the Philippines. Due to the Government’s
implementation of tax reforms and drive to reduce its budget deficit, Fitch and S&P upgraded their
ratings outlook on the Philippines from “negative” to “stable” in February 2006. Moody’s on the other
hand maintained its “negative” outlook, citing the need for the Government to demonstrate a
sustained commitment to implement tax reforms and achieve a much improved fiscal position.
While a new VAT law is in place and the Government has achieved lower budget deficits, there is no
assurance that the Government’s fiscal position will continue to improve. Should economic conditions
of the Philippines deteriorate, such deterioration could materially and adversely affect Ayala’s
financial condition and results of operations.
Foreign Exchange Rate Fluctuation
Ayala’s revenues are predominantly denominated in Pesos, while certain expenses, including debt
obligations, are denominated in currencies other than Pesos (principally U.S. Dollars). To fund its
investments, Ayala borrows in U.S. Dollars as the international market is the most efficient way to
raise funds for significant volumes. To hedge against this foreign currency exposure, Ayala utilizes
short to medium term hedges to protect itself from any Peso depreciation. Furthermore, Ayala also
keeps short term U.S. Dollar investments as part of its liquid assets.
During the last decade, the Philippines, from time to time, has experienced devaluations of the Peso
and limited foreign exchange. From 1996 to 2004, the Peso depreciated at a rate of 10% per annum
from P26.288 per U.S. Dollar at end-1996 to P56.341 at end-2004. Owing to the implementation of
the new VAT law as well as strong inflows of OFW remittances, the Peso strengthened to P53.09 per
U.S. Dollar at end-2005, and further rose to P49.03 per U.S. Dollar by end-2006. It closed at P46.24
against the U.S. Dollar at end-June 2007.
There can be no assurance that future Peso devaluations will not occur or that the availability of
foreign exchange will not be limited. Recurrence of these conditions may adversely affect Ayala’s
financial condition and results of operations.
RISKS ASSOCIATED WITH THE COMPANY
Holding Company Structure
As a holding company, Ayala operates principally through its subsidiaries and affiliates. Claims of
creditors of Ayala’s subsidiaries and affiliates, including trade creditors, bank lenders and other
creditors, will have priority over any claims of Ayala and holders of the Bond with respect to the
assets of such subsidiaries and affiliates.
Substantially all of Ayala’s cash flow is dependent on cash distributions from, or the proceeds of the
realization of, its investments in subsidiaries and affiliates. The ability of Ayala’s subsidiaries and
affiliates to pay dividends to stockholders is subject to applicable law and restrictions contained in
debt instruments of such subsidiaries and affiliates and may also be subject to deduction for taxes. In
addition, the declaration of dividends by Philippine banks is subject to approval by the BSP, thereby
affecting the payment of dividends from Ayala’s banking affiliate, the BPI Group, to Ayala. To the
extent possible, Ayala monitors and supervises the performance of its subsidiaries and affiliates to
help generate or improve such cash distributions and proceeds. There is no assurance, however,
that Ayala can generate sufficient cash flow from dividends or other payments to allow it meet its
27
Risk Factors
obligations under the Bonds. Any shortfall would have to be made up from other available sources of
cash, such as a sale of investments or proceeds from other refinancing activities available to Ayala.
Ayala, its subsidiaries and affiliates have a substantial number of contractual and working
arrangements with each other. While Ayala believes that all contractual arrangements between and
among itself, its subsidiaries and affiliates, are entered into on an arms-length basis, there can be no
assurance that any such contract is on terms as favorable as could have been obtained in a
transaction with an unrelated third party. There is also no assurance that future working
arrangements between related parties will not involve conflicts of interest.
Intensive Capital Requirements
A number of Ayala’s principal operating companies operate in highly capital intensive industries
where it is critical to be able to keep up considerable levels of capital investments in order to maintain
market position and sustain growth. These industries include property development,
telecommunications and water utilities. Ayala believes however that its principal operating companies
will be able to meet their respective future capital expenditure requirements from their own internally
generated cash flows and borrowing capacity with minimal or no additional funding support from
Ayala.
Foreign Exchange Risk
Ayala incurs foreign exchange risk as part of its business as it may elect to finance its investments in
foreign currency. To manage this exposure, Ayala may utilize short- to medium-term hedges. In
addition, the Company maintains part of its liquid assets in short-term foreign currency denominated
investments.
Competition
All of Ayala’s main operating subsidiaries and affiliates operate in highly competitive industries.
Changes in Philippine laws such as increased liberalization and tariff reductions may result in
lowering the barriers to entry in industries where Ayala’s subsidiaries and affiliates operate resulting
in increased competition. No assurance can be given that increased competition in the various
industry segments will not adversely affect Ayala’s financial condition and results of operations.
Industry Risks
Ayala operates in four key areas: real estate and hotels, financial services, telecommunications and a
portfolio of other investments which includes water utilities, electronics and information technology, as
well as automotive and international operations. These areas have inherent risks, to wit:
Real Estate and Hotels
The Philippine property market has, in recent years, shown remarkable year-on-year growth in terms
of the number of development projects being undertaken. The steady rise in the Philippine economy
in the past several years coupled by the massive interest among Overseas Filipino Workers wanting
to establish permanent or temporary residence in the Philippines is expected to support this growth.
Construction is widespread not only in Metro Manila but in outlying provinces and other major cities
as well. This current property boom indicates that the industry is now recovering from the effective of
the Asian Financial Crisis. Any changes in demand, however, may result in a glut in the industry
which may again depress prices similar to what happened in 2007.
28
Risk Factors
Financial Services
The Philippine banking industry has seen a significant increase in the number of commercial banks,
especially since the liberalization of operations by foreign banks. The number of commercial banks
increased from approximately 30 prior to liberalization to more than 50. However, as of June 30,
2007, the number of commercial banks had declined to 38 (according to BSP Web site) as a result of
mergers and closures. Competition has remained intense despite the industry consolidation.
Corporate lending remained very competitive resulting in even narrower spreads. Pockets of growth
were seen in the middle corporate market segment; yields in this segment were wider but continued to
be highly vulnerable to economic shocks. The modest demand for corporate loans prodded banks
to venture more extensively into consumer lending. BPI, being a well-entrenched, long-term player,
has an advantage in this segment, given its depth of experience in credit selection, collection and
asset recovery.
Telecommunications
The Philippine telecommunications industry, particularly wireless communications, has been notably
competitive as competitors have sought to increase market share by attracting new subscribers. The
principal players in Philippine telecommunications are Globe, Philippine Long Distance Telephone
Company (“PLDT”) and its wireless subsidiary Smart Communications, Inc. (“Smart”) and Digitel
Communications Philippines, Inc. (“Digitel”) which launched its wireless “Sun Cellular” mobile service
in 2003. Other players include Bayan Telecommunications Philippines, Inc. (“Bayantel”) and Express
Telecommunications Company (“Extelcom”), which are both licensed to provide wireless mobile
services, and Infocom Communications Network, Inc. a licensed wireless trunked radio service
operator.
While wireless subscriber growth is expected to continue, it may not continue to grow at the same
rate as in the past. Further reductions in rates, wider penetration into lower-usage subscriber
segments, and the intensive competition may also result in declining average revenues per
subscriber.
Other industry considerations include the capital-intensive nature of the business, the rapid pace of
changes in telecommunications technology, and the regulated nature of the industry.
Others
Ayala’s portfolio of investments includes an investment in a water utility business, MWC. MWC
operates in a highly regulated environment under the terms of the Concession Agreement entered
into with the Government. Among others, the operations of this business will be materially affected
by MWC’s ability to implement rate increases, meet capital expenditure requirements and concession
fee payments (to the Government), comply with operating and performance targets specified under
the Concession Agreement and the availability of adequate raw water supply.
Ayala is also involved in electronics contract manufacturing through the Integrated Microelectronics,
Inc. (“IMI”), which is engaged in electronics assembly and product and engineering design. IMI’s
principal products comprise printed circuit board assemblies (“PCBAs”), computer peripherals and
storage devices and other electronic sub-assemblies for export to various consumer and industrial
applications. IMI’s principal customers operate in a highly competitive global environment dominated
by several large participants. Global downturns in industry demand and increasing competition from
countries such as China could also materially impact IMI’s operating performance moving forward.
Azalea Technology Investments, Inc. (“Azalea”) is Ayala’s investment vehicle in mobile and ecommerce opportunities, communications, technologies and other IT-enabled services. The industries
29
Risk Factors
in which Azalea’s investment companies operate are emerging industries which, while offering
significant growth opportunities, are also exposed to significant technology risks and competition.
There can be no assurance that these investments will deliver Ayala with adequate returns.
Ayala also maintains investments in the automotive industry through its ownership of car dealerships
for Honda passenger cars and Isuzu Asian utility vehicles, commercial vehicles and trucks. These
operations depend largely on the market demand for commercial vehicles and passenger cars, as
well as the market acceptance of new product offerings.
Recently, Ayala made investments in business process outsourcing to take advantage of the growth
potential of the sector. The country’s supply of skilled personnel for business process outsourcing
(“BPOs”) may not be sufficient to fill the sector’s growing demand for labor, which can pose
challenges in recruitment and employee retention, and provide pressure on training and wage cost for
BPO companies.
Through Ayala International Pte Ltd. (“AIPL”), Ayala also makes overseas real estate investments,
particularly within the Asia-Pacific region, and more recently, the United States. Global downturns in
the property market will materially affect the ability of these investments to deliver their anticipated
returns.
Government Regulation
A material part of Ayala’s businesses including real estate, banking, telecommunications and water
utilities operate in an environment with various degrees of Government regulation. The introduction of
inconsistent or unpredictable application of, or changes in, Government regulations may from time to
time materially affect the operations of Ayala’s businesses.
RISKS ASSOCIATED WITH THE BONDS
Market for the Bonds
There is no active secondary market for the Bonds. Ayala cannot assure Bondholders that an active
market will develop for the Bonds. Even if an active market for the Bonds developed, the Bonds
could trade at prices higher or lower than the initial offering price due to prevailing interest rates,
Ayala’s operations, the overall market for debt securities and other factors. Accordingly, no assurance
can be given as to the liquidity of, or trading market for, the Bonds.
Further, while Ayala intends to cause the listing of the Bonds on a securities exchange licensed with
the SEC and has initiated discussions with the Philippine Dealing and Exchange Corp ("PDEx") for
this purpose, there is no guarantee that the application will be approved or as to the timing thereof.
30
USE OF PROCEEDS
Ayala expects to raise gross proceeds amounting to P5,000,000,000.00 from the Offer. The following
are the estimated expenses to be incurred in the Offering:
SEC Registration Fee
Documentary Stamp Tax
Underwriting, Legal and Agency Fees
Rating Fees
Publication Fees
Other related expenses
2,588,125.00
25,000,000.00
21,250,000.00
3,700,000.00
100,000.00
200,000.00
Total
52,838,125.00
If the Oversubscription Option is not exercised, the net proceeds from the Offering are estimated to
amount to P4,947,161,875.00 after deducting expenses related to the issuance of the Bonds. Ayala
expects to use such net proceeds to refinance peso and USD denominated obligations which have
been paid in 2007 and for general working capital without allocation and with no particular order of
priority.
In the event that the net proceeds of the Offer are substantially less than the amounts required for the
above-mentioned purposes, the Company has internally-generated funds and sufficient access to
other credit facilities, including bank lines amounting to approximately USD 200 million, which the
Company may utilize to satisfy these obligations and working capital requirements. There are no
material amounts of other funds necessary to accomplish the specified purpose for which the Offer is
made.
The details of Ayala’s peso and USD obligations are as follows:
Obligation
Preferred Shares
“A-2”
Preferred Shares
“A-3”
Term Loan
Term Loan
Term Loan
USD Syndicated
Loan
USD Loan
Original
Maturity Date
January 2009
Prepayment Date
Rate
Amount
July 2007
10.35%
P1,500,000,000.00
August 2009
August 2007
10.46%
P1,000,000,000.00
October 2008
October 2008
October 2008
October 2008
April 2007
April 2007
April 2007
April 2007
P500,000,000.00
P500,000,000.00
P750,000,000.00
USD65,600,000.00
May 2009
April 2007
10.60%
10.60%
10.60%
Libor + 240
bps
Libor + 105
bps
USD 20,000,000.00
The Preferred Shares Series “A-2” were issued in January 2004. The Preferred Shares Series “A-3”
were issued in August 2004.
The peso term loans were all raised in October 2003.
The USD Syndicated Loan was raised through Ayala’s financing equity, AC International Finance Ltd.
in October 2003.
31
DETERMINATION OF THE OFFERING PRICE
Each series of the Bonds shall be issued on a fully-paid basis and at an issue price that is at par.
32
PLAN OF DISTRIBUTION
Ayala plans to issue the Bonds on a lump-sum basis through designated Joint Lead Underwriters and
Bookrunners.
UNDERWRITING OBLIGATIONS OF THE JOINT LEAD UNDERWRITERS AND BOOKRUNNERS
BPI Capital Corporation (“BPI Capital”), BDO Capital & Investment Corporation, First Metro
Investment Corporation, ING Bank, N.V., Manila Branch, Land Bank of the Philippines, and Standard
Chartered Bank, pursuant to an Underwriting and Issue Management Agreement with Ayala (the
“Underwriting and Issue Management Agreement”) to be executed on November 12, 2007, have
agreed to act as the Joint Lead Underwriters and Bookrunners for the Offer and as such, distribute
and sell the Bonds at the Issue Price, and have also committed to underwrite up to Five Billion Pesos
(P5,000,000,000.00) on a firm basis, in either case subject to the satisfaction of certain conditions
and in consideration for certain fees and expenses.
Ayala has also granted the Joint Lead Underwriters and Bookrunners an Oversubscription Option,
exercisable within the Offer Period, to purchase, on a firm basis, up to an additional Three Billion
Pesos (P3,000,000,000.00), on the same terms and conditions set forth in this Prospectus, solely to
cover oversubscriptions, if any.
BPI Capital shall be the sole Issue Manager for this transaction.
The Joint Lead Underwriters and Bookrunners will receive a fee of 0.40%, grossed up for gross
receipts tax, on the underwritten principal amount of the Bonds issued. Such fee shall be inclusive of
underwriting, and participation commissions.
The amount of the commitments of the Joint Lead Underwriters and Bookrunners is as follows:
BPI Capital Capital
BDO Capital & Investment Corporation
First Metro Investment Corporation
ING Bank, N.V., Manila Branch
Land Bank of the Philippines
Standard Chartered Bank
P
1,000,000,000.00
800,000,000.00
800,000,000.00
800,000,000.00
800,000,000.00
800,000,000.00
Total
P
5,000,000,000.00
The Three Billion Pesos (P3,000,000,000.00) Oversubscription Option, if exercised, will be divided
equally among the Joint Lead Underwriters and Bookrunners.
There is no arrangement for the Joint Lead Underwriters and Bookrunners to put back to Ayala any
unsold Bonds. The Underwriting and Issue Management Agreement may be terminated in certain
circumstances prior to payment being made to Ayala of the net proceeds of the Bonds.
The Joint Lead Underwriters and Bookrunners are duly licensed by the SEC to engage in
underwriting or distribution of the Bonds. The Joint Lead Underwriters and Bookrunners may, from
time to time, engage in transactions with and perform services in the ordinary course of its business
for Ayala or other members of the Ayala Group of which Ayala forms a part.
Except for BPI Capital, the Joint Lead Underwriters and Bookrunners have no direct relations with
Ayala in terms of ownership by either of their respective major stockholder/s. BPI Capital is a wholly
33
Plan of Distribution
owned subsidiary of BPI, an affiliate of Ayala, which has an effective ownership of 33.6% in BPI as of
June 30, 2007.
None of the Joint Lead Underwriters and Bookrunners has the right to designate or nominate a
member of the Board of Ayala.
SALE AND DISTRIBUTION
(a) The distribution and sale of the Bonds shall be undertaken by the Joint Lead Underwriters and
Bookrunners who shall sell and distribute the Bonds to third party buyers/investors. Nothing
herein shall limit the rights of the Joint Lead Underwriters and Bookrunners from purchasing the
Bonds for their own respective accounts.
(b) The obligations of each of the Joint Lead Underwriters and Bookrunners will be several, and not
joint and solidary, and nothing in the Underwriting and Issue Management Agreement shall be
deemed to create a partnership or joint venture between and among any of the Joint Lead
Underwriters and Bookrunners. Unless otherwise expressly provided in the Underwriting and
Issue Management Agreement, the failure by any of the Joint Lead Underwriters and
Bookrunners to carry out its obligations thereunder shall not relieve any other Joint Lead
Underwriter and Bookrunner of its obligations thereunder, nor shall any Joint Lead Underwriter
and Bookrunner be responsible for the obligations of any other Joint Lead Underwriter and
Bookrunner thereunder.
DESIGNATED SHARES AND ALLOCATIONS
Each Joint Lead Underwriter and Bookrunner may take on any portion up to the full amount of the
Issue, as determined by Ayala.
TERM OF APPOINTMENT
The engagements of the Joint Lead Underwriters and Bookrunners, as well as the Issue Manager
shall subsist so long as the SEC Permit remains valid, unless otherwise terminated by Ayala, the
Issue Manager or the Joint Lead Underwriters and Bookrunners.
MANNER OF DISTRIBUTION
The Joint Lead Underwriters and Bookrunners shall, at their discretion, determine the manner by
which proposals for subscriptions to, and issuances of, Bonds shall be solicited, with the primary sale
of Bonds to be effected only through the Joint Lead Underwriters and Bookrunners.
OFFER PERIOD
The Offer Period shall commence at 1:00 pm on November 12, 2007 and end at 3:00 p.m. of
November 16, 2007.
APPLICATION TO PURCHASE
Applicants may purchase the Bonds during the Offer Period by submitting to the Joint Lead
Underwriters and Bookrunners a properly completed Application to Purchase, together with two (2)
signature cards, and the full payment of the purchase price of the Bonds in the manner provided
therein. Corporate and institutional applicants must also submit, in addition to the foregoing, a copy of
their SEC Certificate of Registration of Articles of Incorporation and By-Laws, Articles of
Incorporation, By-Laws, and the appropriate authorization by their respective boards of directors
and/or committees or bodies authorizing the purchase of the Bonds and designating the authorized
signatory(ies) thereof. Individual applicants must also submit, in addition to the foregoing, a
34
photocopy of any one of the following identification cards (“ID”): passport/driver’s license/postal ID,
company ID, SSS/GSIS ID and/or Senior Citizen’s ID.
A corporate and institutional investor who is exempt from or is not subject to the aforesaid withholding
tax shall be required to submit the following requirements to the Registrar, subject to acceptance by
the Issuer as being sufficient in form and substance: (i) certified true copy of the tax exemption
certificate, ruling or opinion issued by the Bureau of Internal Revenue; (ii) a duly notarized
undertaking, in the prescribed from, declaring and warranting its tax exempt status, undertaking to
immediately notify the Issuer of any suspension or revocation of the tax exemption certificates and
agreeing to indemnify and hold the Issuer free and harmless against any claims, actions, suits, and
liabilities resulting from the non-withholding of the required tax; and (iii) such other documentary
requirements as may be required under the applicable regulations of the relevant taxing or other
authorities, provided further, that all sums payable by the Issuer to tax exempt entities shall be paid in
full without deductions for taxes, duties assessments or government charges subject to the
submission by the Bondholder claiming the benefit of any exemption of reasonable evidence of such
exemption to the Registrar.
Completed Applications to Purchase and corresponding payments must reach the Joint Lead
Underwriters and Bookrunners prior to the end of the Offer Period, or such earlier date as may be
specified by the Joint Lead Underwriters and Bookrunners. Acceptance by the Joint Lead
Underwriters and Bookrunners of the completed Application to Purchase shall be subject to the
availability of the Bonds and the acceptance by Ayala. In the event that any check payment is
returned by the drawee bank for any reason whatsoever, the Application to Purchase shall be
automatically canceled and any prior acceptance of the Application to Purchase is deemed revoked.
MINIMUM PURCHASE
A minimum purchase of Fifty Thousand Pesos (P50,000.00) shall be considered for acceptance.
Purchases in excess of the minimum shall be in multiples of Fifty Thousand Pesos (P 50,000.00).
ALLOTMENT OF THE BONDS
If the Bonds are insufficient to satisfy all Applications to Purchase, the available Bonds shall be
allotted in accordance with the chronological order of submission of properly completed Applications
to Purchase on a first-come, first-served basis, subject to Ayala’s right of rejection.
REFUNDS
If any application is rejected or accepted in part only, the application money or the appropriate portion
thereof will be returned without interest to such applicant through the relevant Joint Lead Underwriter
and Bookrunner from whom such application to purchase the Bonds was made.
UNCLAIMED PAYMENTS
Any payment of interest on, or the principal of the Bonds which remain unclaimed after the same shall
have become due and payable, shall be held in trust by the Paying Agent for the Bondholders at the
latter’s risk.
CANCELLATION AND RE-ISSUANCE
Bonds, which have been redeemed, may be re-issued by Ayala under such terms and conditions as
may be approved by Ayala’s Board of Directors.
35
SECONDARY MARKET
The Joint Lead Underwriters and Bookrunners shall endeavor to establish a trading mechanism to
allow for the orderly trading of the Bonds in the secondary market.
Ayala, however, intends to cause the listing of the Bonds on a securities exchange licensed with the
SEC and has initiated discussions with the Philippine Dealing and Exchange Corp ("PDEx") for this
purpose.
Ayala may purchase the Bonds at any time in the open market or by tender or by contract at any
price, without any obligation to make pro-rata purchases of Bonds from all Bondholders.
REGISTRY OF BONDHOLDERS
The Bonds shall be issued in scripless form and will be eligible for trading under the Scripless bookentry system of the PDTC. A Master Certificate of Indebtedness representing the Bonds sold in the
Offer shall be issued to and registered in the name of the Trustee, on behalf of the Bondholders. The
Joint Lead Underwriters and Bookrunners are required to designate a PDTC Participant for the
lodgement of the Bonds, on behalf of their respective Bondholders.
Legal title to the Bonds shall be shown in the Register of Holders to be maintained by the designated
registrar for the Bonds. Initial placement of the Bonds and subsequent transfers of interests in the
Bonds shall be subject to applicable Philippine selling restrictions prevailing from time to time. Ayala
will cause the Register of Bondholders to be kept at the specified office of the Registrar. The names
and addresses of the Bondholders and the particulars of the Bonds held by them and of all transfers
of Bonds shall be entered into the Register of Bondholders.
EXPENSES
All out-of-pocket expenses, including but not limited to, registration with the SEC, credit rating,
printing, publicity, communication and signing expenses incurred by the Issue Manager and the Joint
Lead Underwriters and Bookrunners in the negotiation and execution of the transaction will be for
Ayala’s account irrespective of whether the transaction contemplated herein is completed. Such
expenses are to be reimbursed upon presentation of a composite statement of account.
The amount of such fees and expenses of the Offering are estimated as follows:
SEC Registration Fee
Documentary Stamp Tax
Underwriting, Legal and Agency Fees
Rating Fees
Publication Fees
Other related expenses
P
2,588,125.00
25,000,000.00
21,250,000.00
3,700,000.00
100,000.00
200,000.00
Total
P
52,383,125.00
36
THE COMPANY
OVERVIEW
Ayala was incorporated in the Philippines on January 23, 1968 as a limited liability corporation having
a renewable term of 50 years. It is organized as a holding company holding equity interests in the
Group, one of the most significant business groups in the Philippines. Ayala’s business activities are
divided into four key areas: (a) real estate and hotels, (b) financial services, (c) telecommunications
and (d) a portfolio of other investments held under an internal development division called AC Capital.
AC Capital’s current holdings include investments in water distribution, electronics manufacturing,
automotive dealerships, international real estate investments, IT-related ventures, business process
outsourcing, and various other non-core real-estate assets. Ayala’s operating companies are widely
recognized as among the dominant companies in their respective industry sectors. Ayala became a
public corporation in 1976 and its common shares are currently listed at the Philippine Stock
Exchange (“PSE”). As of June 30, 2007, Ayala had a market capitalization of P225.6 billion and a net
worth (stockholders’ equity) of P86.02 billion.
The following table shows AC’s direct and effective ownership in its principal subsidiaries and
affiliates within business sectors as of June 30, 2007:
Direct ownership
(%)
Effective ownership
(%)
Real Estate and Hotels:
Ayala Land, Inc.
Ayala Hotels, Inc.
53.2
50.0
53.2
76.6
Financial services
Bank of the Philippine Islands
21.8
33.6
Telecommunications
Globe Telecom, Inc.
33.4
33.4
100.0
70.4
21.7
100.0
100.0
100.0
100.0
70.4
30.0
100.0
100.0
100.0
AC Capital
Ayala International Pte Ltd
Integrated Microelectronics, Inc.
Manila Water Company, Inc.
Azalea Technology Investments, Inc.
Ayala Automotive Holdings Corp.
Ayala Aviation Corp.
STRATEGY
Ayala seeks to ensure that the Group maintains its commitment to its business activities in the
Philippines and to explore possible international initiatives on a selective and opportunistic basis.
Ayala intends to build on its leadership position in the Group's existing core businesses in real estate,
financial services and telecommunications, and to actively manage its portfolio of other investments
and assets under AC Capital with a view toward maximum value creation and realization. Ayala
expects its real estate, financial services and telecommunications businesses to remain as its
principal sources of dividend income, with growing contributions from its water distribution, electronics
manufacturing and automotive dealership operations. Ayala is presented from time to time with
opportunities to invest in new business areas and will continue to consider such opportunities to the
extent that such business would contribute to the overall strategic objectives of the Group.
37
The Company
INTRA-GROUP TRANSACTIONS
Ayala, its subsidiaries and certain of its affiliates have a substantial number of contractual
arrangements with each other. Ayala’s subsidiaries and affiliates are independent entities and
accordingly Ayala’s contractual arrangements with such corporations are entered into on an arm’slength basis. The Group has, in the ordinary course of its business, entered into transactions with
associates, joint ventures and other related parties principally consisting mainly of advances and
reimbursement of expenses, various guarantees, construction contracts and management, marketing
and administrative service agreements. Sales and purchases of goods and services to and from
related parties are made at current market prices. In addition, Ayala obtains borrowings from banks
and other financial institutions, including BPI, an affiliated commercial bank. Ayala’s borrowings are
governed by existing BSP regulations, including in particular in respect of its borrowings from BPI,
regulations on loans to Directors, Officers, Stockholders and other Related Interests. Other than
Ayala’s borrowings from BPI, Ayala had no other transaction in which any of its Directors or Executive
Officers was involved or had a direct or indirect material interest. There can be no assurance,
however, that future arrangements between related parties will not involve conflicts of interest.
GEOGRAPHICAL SEGMENTS
Ayala generates foreign sales through its subsidiaries IMI, AIPL, Azalea Technology Investments, Inc.
and LiveIt Solutions, Inc. For the full-year of 2006, total foreign sales amounted to P 21.0 billion, out
of the total P 70.2 billion, from P 10.6 billion in 2005. IMI accounted for 96% of total foreign sales in
2006 from 95% in 2005. The table below lists the contribution of each subsidiary to Ayala’s foreign
sales:
2006
IMI
AIPL
Azalea
LiveIt
2005
IMI
AIPL
Azalea
LiveIt
USA
81%
9%
7%
3%
100%
Europe
100%
Japan
100%
Others
100%
100%
100%
100%
USA
72%
23%
5%
0%
100%
Europe
100%
Japan
100%
Others
100%
100%
100%
100%
DIVIDEND POLICY
Following are the dividends declared and paid by Ayala from 2005:
Stock Dividends
Percent
Record date
Payment date
20%
July 24, 2000
August 14, 2000
20%
April 16, 2004
May 12, 2004
20%
May 22, 2007
June 18, 2007
There were no stock dividend declarations for 2001 to 2003 and 2005 to 2006.
38
The Company
Cash Dividends – 2005
Class
Payment date
Rate (P)
Record Date
On common shares
July 19, 2005
January 31, 2006
2.00/share
2.00/share
June 24,2005
January 6,2006
Class
Payment Date
Rate (P)
Record date
On common shares
July 28, 2006
January 30, 2007
6.00/share
2.00/share
July 6, 2006
January 5, 2007
Class
Payment Date
Rate (P)
Record date
On common shares
July 31, 2007
4.00/share
July 6, 2007
Dividends declared by the Company on its shares of stocks are payable in cash or in additional
shares of stock. The payment of dividends in the future will depend upon the earnings, cash flow and
financial condition of the Company and other factors.
Ayala’s retained earnings include the accumulated equity in undistributed net earnings of
consolidated subsidiaries, associates and joint ventures accounted for under the equity method
amounting to P24,858.9 million, P18,487.9 million and P15,430.9 as of December 31, 2006, 2005 and
2004, respectively. These amounts are not available for dividend declaration until received in the form
of dividends from the subsidiaries, associates and joint ventures. Retained earnings are further
restricted for the payment of dividends to the extent of the cost of the common shares held in treasury
consisting of 4,379 as of December 31, 2006 and 2005 and 216 common shares as of December 31,
2004.
STOCK PRICES
Ayala’s common shares are listed at the PSE. The closing prices of Ayala’s common shares for 2004,
2005, 2006 and first half 2007, adjusted for stock dividends paid in July 2007 and the reverse stock
split in May 2005, are as follows:
2007
(in P)
High
Low
st
1 quarter
nd
2 quarter
rd
3 quarter
th
4 quarter
550.00
580.00
n.a.
n.a.
433.33
466.67
n.a.
n.a.
2006
(in P)
High
Low
304.17
393.75
397.92
491.67
264.58
279.17
308.33
377.08
2005
(in P)
High
Low
362.50
320.83
277.08
293.75
279.17
262.50
227.08
235.42
2004
(in P)
High
Low
232.64
250.00
270.83
279.17
187.50
208.33
216.67
258.33
RECENT SALE OF SECURITIES
For the past three years, the Company issued Preferred Shares with details as follows:
Security
Issue Date
No. of Shares
Issue Price *
Arranger
Preferred “A” Series 2
Preferred “A” Series 3
23 January 2004
03 August 2004
300,000,000
200,000,000
P 1.5 Billion
P 1.0 Billion
Standard Chartered
JP Morgan
* P5 / Preferred share
39
The Company
An exemption from registration was claimed with the SEC under Section 10.1 (k) of the SRC, “The
sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve
month period.”
There were a total of 42,347 shares issued from January to September 2007 and 54,504 fully-paid
shares as of September 2007 representing the exercise of stock options and full payment on stock
ownership subscriptions by Ayala’s executives. The aforesaid issuance of shares was covered by the
SEC’s approval of Ayala’s Executive Stock Ownership Plan in December 2005.
On 15 June 2007, Ayala filed an application with the SEC relating to a request for exemption from
registration requirements of an additional 6.6 million common shares representing additional
allocations for the Executive Stock Ownership Plan. The application is still currently pending with the
SEC.
DESCRIPTION OF PROPERTY
Ayala owns four floors of the Tower One Building located in Ayala Triangle, Ayala Avenue, Makati
City. These condominium units were purchased in 1995 and are used as Ayala’s corporate
headquarters. Other properties of Ayala include various provincial lots relating to its business
operations totaling about 860 hectares and Metro Manila lots totaling 2.6 hectares. Other than as
described above, Ayala, as a holding company does not hold significant properties apart from its
investments in its subsidiaries. A discussion on the assets, prospects and challenges of each
subsidiary of Ayala is set forth in the “Business” section of this Prospectus.
MATERIAL CONTRACTS
The contracts of Ayala and its subsidiaries are in the ordinary course of their respective businesses,
and are on an arms’ length basis. Aside from Ayala’s (a) P3.0 billion and P4.2 billion notes issued in
2005 and (b) U.S.$20 million investment commitment in the Rohatyn Group Special Opportunity Fund
Ltd (SOF) (“Rohatyn”) in April 2006, each of which has been previously disclosed to the SEC and
PSE, the Company has no contract not made in the ordinary course of business which is material to
the Company and is to be performed in whole or in part at or after the filing of the registration
statement with the SEC in relation to the Offer, or was entered into not more than two years before
such filing.
Details of the foregoing previously-disclosed contracts, which were contained in the appropriate
submissions to the SEC and the PSE, are summarized as follows:
(a) P3.0 billion and P4.2 billion notes -- In 2005, Ayala issued fixed rate corporate notes with a fixed
rate of 10% per annum with an aggregate face value of up to P3.0 billion to not more than 19
primary institutional lenders pursuant to Rule 9.9(2)(B) of the Securities Regulation Code’s
implementing rules and regulations. The notes are unsecured and subject to an optional
redemption by Ayala in whole of the relevant outstanding notes on any Coupon Payment Date (as
defined in the notes) beginning from the third year anniversary date of the issue date.
Also in 2005, Ayala issued seven-year fixed rate corporate notes with a fixed rate of 10.375% per
annum with an aggregate face value of up to P4.2 billion. The notes are unsecured and are
subject to an optional redemption by Ayala beginning from the fourth anniversary date of the
issue date.
(b) U.S.$20 million investment commitment in Rohatyn -- In April 2006, Ayala approved an
investment of up to U.S.$20 million in Rohatyn. The investment manager of the fund is TRG
Management LP, which is a member of the Rohatyn Group. Any such investment will be made
by Azalea International Venture Partners, Ltd. (“Azalea International”), a subsidiary of Azalea.
The fund’s primary objective is to generate superior risk adjusted returns and, from time to time,
40
The Company
current income by acquiring a diversified portfolio of undervalued investments and investments
with significant growth potential in emerging market regions.
MATERIAL PATENTS, TRADEMARKS, AND INTELLECTUAL PROPERTIES
Ayala has no material patent, trademark or intellectual property right to products which would be
material to the Offer. Ayala’s operating companies, however, may have these material intellectual
property rights, but the dates and terms of their expiration or renewal is not perceived to have a
material adverse effect on Ayala or the Offer.
CHANGES IN CONTROL
Ayala is not aware of the existence of any agreement that may result in a change in control of Ayala.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Ayala, in its regular course of trade or business, enters into transactions with its subsidiaries involving
mainly advances. In addition, Ayala obtains borrowings from banks and other financial institutions,
including an affiliated commercial bank. However, there has not been any material transaction during
the last two years, or relating to the proposed transaction, to which Ayala was or is to be a party, in
which any of its Directors or Executive Officers, any nominee for election as a Director or any security
holder identified in this Prospectus had or is to have a direct or indirect material interest.
Neither has Ayala has entered into any arrangements or transactions with parties that fall outside the
definition of “Related parties” under SFAS/IAS No. 24, but with whom it or its related parties may
have a relationship that would enable it to negotiate terms that may not be available to other more
independent entities.
COSTS OF ENVIRONMENTAL COMPLIANCE
In general, there have been no materially significant or extraordinary costs incurred by Ayala and its
subsidiaries, taken as a whole, in respect of environmental compliance. Ayala and its subsidiaries’
costs of compliance with applicable environmental laws and regulations vary from project to project
depending on various factors, especially local conditions. However, none of such costs have been
material in respect of their finances as a whole.
DEVELOPMENT COSTS
As a holding company, Ayala has no material development activities.
CORPORATE GOVERNANCE
Ayala has always been committed to best practices of corporate governance. It has endured for more
than 170 years due in large part to the integrity it has earned, the performance it has achieved and
the governance standards it has upheld these many years. The Company’s corporate governance
principles were formalized in its Manual of Corporate Governance (the “Manual”), which the Company
adopted on September 2, 2002 and has since complied with. The Manual establishes corporate
governance practices that are founded on rigorous systems and processes designed to ensure the
Company’s progress and stability, that an effective system of check and balance is in place and that a
high standard of accountability and transparency to all stakeholders is enforced.
The Manual conforms to the SEC’s requirements for manuals of corporate governance. It defines
primarily the roles and responsibilities of the Board, Management and the Executive Officers. More
importantly, it includes a statement of their respective liabilities in the event of non-compliance or
violations of any of the provisions of the Manual. It also establishes, among others, policies on (a)
41
The Company
independent directors, (b) Board committees, (c) conflicts of interest, (d) internal and external audit
procedures and practices, (e) stockholders’ rights and interests and (f) management’s responsibility
to communicate and inform stakeholders matters related to the Company’s affairs. The principles
embodied in the Manual lay the foundation for the appropriate supervision and good management of
the Company to safeguard shareholders’ interests and sustain the Company’s long-term growth.
•
The evaluation system which was established to measure or determine the level of compliance of
the Board of Directors and top level management with its Manual of Corporate Governance
consists of a Board Performance Assessment which is accomplished by the Board of Directors
indicating the compliance ratings. The above is submitted to the Compliance Officer who issues
the required certificate of compliance with the Company’s Corporate Governance Manual to the
Securities and Exchange Commission.
•
To ensure good governance, the Board establishes the vision, strategic objectives, key policies,
and procedures for the management of the company, as well as the mechanism for monitoring
and evaluating Management’s performance. The Board also ensures the presence and adequacy
of internal control mechanisms for good governance.
•
There were no deviations from the Company’s Manual of Corporate Governance. The Company
has adopted in the Manual of Corporate Governance the leading practices and principles of good
corporate governance, and full compliance therewith has been made since the adoption of the
Manual.
•
The Company is taking further steps to enhance adherence to principles and practices of good
corporate governance
The Board regularly meets at least on a quarterly basis. It ensures the presence and adequacy of
internal control mechanisms for good governance in accordance with the Manual. The minimum
internal control mechanisms for the Board’s oversight responsibility include, but are not limited to:
•
Ensuring the presence of organizational and procedural controls, supported by an effective
management information system and risk management reporting system;
•
Reviewing conflict-of-interest situations and providing appropriate remedial measures for the
same;
•
Appointing a Chief Executive Officer (“CEO”) with the appropriate ability, integrity and experience
to fill the role, as well as defining the CEO’s duties and responsibilities;
•
Reviewing proposed senior management appointments;
•
Ensuring the selection, appointment and retention of qualified and competent management;
reviewing the Company’s personnel and human resources policies, compensation plan and the
management succession plan;
•
Institutionalizing the internal audit function; and
•
Ensuring the presence of, and regularly reviewing, the performance and quality of external audit.
42
THE BUSINESS
I.
REAL ESTATE AND HOTELS
Ayala conducts its real estate and hotels business through its subsidiaries Ayala Land, Inc. and Ayala
Hotels. Inc. (“AHI”). As of June 30, 2007, Ayala effectively owned 53.3% of Ayala Land and 76.6% of
AHI.
AYALA LAND, INC.
Ayala Land, one of the largest and most diversified real estate conglomerates in the Philippines, is
principally engaged in the planning, development and marketing of large-scale communities having a
mix of residential, commercial and other uses. Its principal businesses include planning and
development of mixed-use properties, particularly, the subdivision and sale of residential and
commercial lots in planned communities and the development and leasing of retail space and land in
these communities. Ayala Land also builds and sells residential condominium and office buildings,
develops industrial and business parks and develops and sells middle income and affordable housing
units. Ayala Land also owns hotels and movie theaters, and provides property management and
construction services to government infrastructure and other projects. As of December 31, 2006,
Ayala Land’s land bank comprised a total of 4,343 hectares of fully converted properties in various
locations nationwide.
Ayala Land was spun-off by Ayala in 1988 to enhance management focus on its existing real estate
business and to highlight the value of the assets, management and capital structure of the real estate
business. Ayala Land has a market capitalization of P211.8 billion as of September 30, 2007 based
on its shares’ closing price as of that date.
In 1991, Ayala Land shares were offered to the public in a P2.5 billion initial public offering (“IPO”) of
primary and secondary shares, and subsequently listed on the Makati and Manila Stock Exchanges
(the predecessors of the PSE). The IPO diluted Ayala’s effective interest in Ayala Land to 88.2%.
Since then, there were further dilutions and sales of shares and so as of June 30, 2007, Ayala’s
effective interest in Ayala Land stood at 53.3%.
Ayala Land’s subsidiaries and affiliates as of June 30, 2007 were as follows:
Ownership (%)
By Ayala Land
By the Subsidiary /
Affiliate
CORE BUSINESSES
Strategic Landbank Management
Aurora Properties, Inc.
Vesta Property Holdings, Inc.
Ceci Realty, Inc.
Emerging City Holdings, Inc.
Columbus Holdings, Inc.
Bonifacio Land Corporation*
Fort Bonifacio Development Corporation**
Berkshires Holdings, Inc.
Columbus Holdings, Inc.
70.0
70.0
60.0
50.0
4.3
70.0
50.4
55.0
50.0
30.0
43
The Business
Ownership (%)
By Ayala Land
Strategic Landbank Management (continuation)
Fort Bonifacio Development Corporation**
Regent Time International Limited
Streamwood Property, Inc.
Piedmont Property Ventures, Inc.
Stonehaven Land, Inc.
Buendia Landholdings, Inc.
Red Creek Properties, Inc.
Crimson Field Enterprises, Inc.
Crans Montana Property Holdings Corporation
Amorsedia Development Corporation
HLC Development Corporation
4.3
100.0
4.3
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
By the Subsidiary /
Affiliate
50.4
55.0
3.9
100.0
Residential Development
Avida Land Corporation
Buklod Bahayan Realty and Development Corp.
First Communities Realty, Inc.
Avida Sales Corporation
Community Innovations, Inc.
Serendra, Inc.
Roxas Land Corporation
Amorsedia Development Corporation
OLC Development Corporation
Ayala Greenfield Development Corp.
Ayala Land Sales, Inc.
Ayala Land International Sales, Inc.
100.0
100.0
100.0
50.0
100.0
28.1
50.0
100.0
38.9
100.0
50.0
100.0
100.0
Shopping Centers
Northbeacon Commercial Corporation
Station Square East Commercial Corporation
ALI-CII Development Corporation
Alabang Commercial Corporation
North Triangle Depot Commercial Corporation
Lagoon Development Corporation
Ayala Theaters Management, Inc.
South Innovative Theater Management, Inc.
Five Star Cinema, Inc.
Food Court Company, Inc.
Leisure and Allied Industries Phils., Inc.
100.0
69.0
50.0
50.0
49.0
30.0
100.0
100.0
100.0
100.0
50.0
Corporate Business
Laguna Technopark, Inc.
ALI Property Partners Holdings Corporation
ALI Property Partners Corporation
One Dela Rosa Property Development, Inc.
First Gateway Real Estate Corporation
75.0
60.0
60.0
100.0
100.0
Visayas-Mindanao
Cebu Holdings, Inc.
Cebu Property Ventures & Development Corp.
47.2
8.0
44
76.0
The Business
Ownership (%)
By Ayala Land
Visayas-Mindanao (continuation)
Cebu Leisure Company, Inc.
CBP Theatre Management Inc.
Cebu Insular Hotel Company, Inc.
100.0
100.0
37.1
International
First Longfield Investments Limited
Green Horizons Holdings Limited
ARCH Capital Management Co. Ltd.
100.0
100.0
22.0
SUPPORT BUSINESSES
Construction
Makati Development Corporation
MG Construction Ventures Holdings, Inc.
100.0
66.0
Property Management
Ayala Property Management Corporation
100.0
Hotels
Ayala Hotels, Inc.
Enjay Hotels, Inc.
Cebu Insular Hotel Company, Inc.
Makati Property Ventures, Inc.***
50.0
100.0
62.9
60.0
OTHERS
Astoria Investment Ventures, inc.****
ALInet.com, Inc.
MyAyala.com, Inc.
CMPI Holdings, Inc.
CMPI Land, Inc.
Notes:
*
**
***
****
By the Subsidiary /
Affiliate
100.0
100.0
50.0
60.0
60.0
Ayala Land’s effective ownership in Bonifacio Land is 37.2%
Ayala Land’s effective ownership in Fort Bonifacio Development Corporation is 20.5%
Sold AHI’s stake in Nov-06; closing of transaction Mar-07
Pertains to common shares
Ayala Land’s strategy is to maintain and enhance its position as the leading property developer in the
Philippines. It intends to continue its traditional activity of developing large-scale, mixed-used
integrated communities while diversifying its revenue base. Ayala Land hopes to achieve this by: (a)
increasing its rental activities, where it has locked-in growth in gross leasable area with new malls of
various formats and new office projects and (b) expanding its real estate business into different
markets and geographic areas with increasing presence in the middle-income and affordable housing
segments, where it believes there are significant growth opportunities or where proposed
developments will complement its existing real estate business. Furthermore, Ayala Land is
expanding its service businesses, with external contracts accounting for an increasing share of its
services income.
BUSINESS LINES
Ayala Land’s projects are segregated into various business lines, based on their operations. These
business lines, categorized into core businesses and support businesses, are described below.
45
The Business
Core Businesses
1.
Residential Developments
Sale of high-end and middle-income residential lots and units, affordable housing units and lots
and leisure community developments; lease of residential units; marketing of residential
developments
2.
Shopping Centers
Development of commercial centers and lease to third parties of retail space and land therein;
operation of movie theaters, food courts, entertainment facilities and carparks in these
commercial centers; management and operations of malls which are co-owned with partners
3.
Corporate Business
Development and lease or sale of office buildings; management of office buildings under joint
venture; sale of industrial lots and lease of factory buildings
4.
Acquisition, development and sale of large, mixed-use, master-planned communities; sale of
override units or Ayala Land’s share in properties made available to subsidiaries for
development; lease of gas station sites and carparks outside Ayala Center.
5.
Visayas-Mindanao
Development, sale and lease of Ayala Land’s and subsidiaries' product offerings in key cities in
the Visayas and Mindanao regions
Support Businesses
1.
Construction
Land development and construction of Ayala Land and third party projects
2.
Hotels
Development and management of hotels; lease of land to hotel tenants
3.
Property Management
Facilities management of Ayala Land and third-party projects
4.
Waterworks Operations
Operation of water and sewage treatment facilities in some Ayala Land projects
In addition to the above business lines, Ayala Land also derives other income from its investment
activities and sale of non-core assets.
COMPETITION RISKS
Ayala Land is subject to significant competition in its businesses. Ayala Land competes with other
developers and developments to attract residential buyers, shopping center tenants, office tenants
46
The Business
and industrial lot buyers, construction clients, and hotel customers. However, Ayala Land believes
that, at present, there is no single property company that has a significant presence in all sectors of
the property market.
With respect to its mall business, Ayala Land’s main competitor is SM Prime. In terms of asset size,
Ayala Land is bigger compared to SM Prime but the latter’s focus on mall operations gives SM Prime
some edge over Ayala land in this line of business. Nevertheless, Ayala Land is able to effectively
compete for tenants primarily based on its ability to attract customers – which generally depends on
the quality and location of its shopping centers, mix of tenants, reputation as a developer, rental rates
and other charges.
For officer rental properties, Ayala Land sees competition in smaller developers such as Kuok
Properties (developer of Enterprise Building), RLC (Developer of Robinsons Summit Center) and
non-traditional developers such as the AIG Group (developer of Philam Towers) and RCBC
(developer of RCBC towers). For BPO office buildings, Ayala Land competes with the likes of
Megaworld. Ayala Land is able to effectively compete for tenants primarily based upon the quality
and location of its buildings, reputation as a building owner, quality of support services provided by its
property manager, rental and other charges.
With respect to residential lot and condominium sales, Ayala Land competes with smaller developers
such as Megaworld and Fil-Estate Land. Ayala Land is able to effectively compete for purchasers
primarily on the basis of reputation, price, reliability, and the quality and location of the community in
which the relevant site is located.
For the middle-income/affordable housing business, Ayala Land sees the likes of Megaworld,
Filinvest Land and Empire East as key competitors. Community innovations and Avida are able to
effectively compete for buyers based on quality and location of the project and availability of attractive
in-house financing terms.
Residential developments
With respect to high-end residential developments, upper mid-income and affordable housing sales,
Ayala Land competes for purchasers primarily on the basis of reputation, reliability, quality and
location of projects, and availability of in-house financing.
Shopping centers
For its shopping centers, Ayala Land competes for tenants primarily based upon the ability of the
relevant retail center to attract customers. This, in turn, generally depends on the quality and location
of, and mix of tenants in, the relevant retail center and the reputation of the owner of the retail centerand rental and other charges. Ayala Malls attract customers as they offer rewarding experiences in a
sense of place that is innovative, fun and compelling. The market for shopping centers has become
especially competitive and the number of competing properties is expected to grow. Some competing
shopping centers are located within relatively close proximity with some of Ayala Land’s commercial
centers.
Corporate business
For its office rental properties, Ayala Land competes for tenants on the basis of quality and superior
location, the reputation of the building’s owner, the quality of support services provided by the
property manager, as well as rental and other charges.
Construction
Ayala Land’s construction business is benefiting from the improved performance of the construction
47
The Business
industry, particularly from an increase in development activities mostly from the residential and retail
sector. However, any slowdown in the construction business could potentially cap growth of Ayala
Land’s construction arm. Makati Development Corporation (“MDC”) competes for clients on the basis
of quality, cost and speed to market delivery.
Hotels
After a slump of several years, the local hotel sector experienced marked growth in both occupancy
and rental rates. Ayala Land’s hotels, known for their world-class accommodation and service, as
well as premium locations, performed strongly in each of their respective markets. Any slowdown in
tourism could potentially limit growth of Ayala Land’s hotels.
To mitigate the above-mentioned risks, Ayala Land shall continue to adopt appropriate risk
management tools as well as conservative financial and operational controls and policies to manage
the various business risks it faces.
The following table sets forth Ayala Land’s financial highlights:
Ayala Land, Inc. Financial Highlights
(in P millions)
Unaudited
June 30, 2007
Income Statement
Revenues
Net Operating Income (NOI)
Net Income (attributable to equity holders of Ayala Land)
Audited
December 31, 2006
12,298
3,682
2,126
25,559
7,422
3,866
Balance Sheet
Cash and Cash Equivalents
Total Assets
Total Borrowings
Stockholders’ Equity
8,166
76,916
9,959
42,353
9,510
78,196
13,117
40,597
Cash Flow
Net Cash Provided by (Used in) Operating Activities
Net Cash Provided by (Used in) Investing Activities
Net Cash Provided by (Used in) Financing Activities
1,404
1,489
(4,237)
6,080
(4,999)
317
6.89
FY07B
16.16
Consolidated Project and Capital Expenditures
(P billions)
Financial Ratios
Current Ratio
Debt-to-Equity Ratio
Net Debt-to-Equity Ratio
NOI Margin
1.71:1
0.24:1
0.04:1
34%
Return on Equity*
Return on Assets*
5.1%
2.7%
December 31, 2006
1.64:1
0.32:1
0.09:1
32%
FY06
9.8%
5.2%
Note:
* Return on average equity and average assets; 1H07 not annualized
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2007
Ayala Land, Inc. posted a P 2.1 billion net income in the first half of 2007, 12% higher than the P 1.9
billion recorded in the same period last year. This was achieved despite the effect of some non48
The Business
recurring items which caused total revenues to decline 4% to P12.3 billion from
year.
P12.8 billion last
These one-offs included the standardization of the revenue recognition policy for residential
businesses last year, which accelerated the revenue bookings in 1H2006, as well as the discontinued
BPO leasing revenues from the sale of the PeopleSupport Building late last year and the lower hotel
revenues resulting from the sale of Makati Property Ventures, Inc. (MPVI) shares, representing the
company’s stake in Oakwood. The negative impact of these was partially offset by the one-time gain
on the Oakwood transaction. Adjusting for the combined impact of these one-offs, total consolidated
revenues would have been 3% higher year-on-year.
Enabling the company to post a 12% net income growth despite lower revenues were improved net
operating income (NOI) margins across most business lines, resulting in an overall NOI margin of
34%, higher than the 31% achieved in 1H2006. Higher equity earnings from Ayala Land’s corporate
investment vehicles in Bonifacio Global City, as well as the improved earnings performance of
affiliates CHI and Alabang Commercial Corporation (“ACC”), likewise contributed to net income
growth. In addition, a reduction in the company’s effective tax rate (23% in 1H2007 from 32% in the
comparable period last year) driven by the lower tax rate applied to the gain on the sale of MPVI
shares, helped drive profitability. Excluding the after-tax impact of one-off non-core transactions such
as gain on the sale of Oakwood (and Bridgebury / Atrium last year), net income growth was even
more robust at 24% higher year-on-year.
Demand for the company’s projects remained strong in the first six months of 2007 and this was
reflected in the healthy underlying performance indicators. On the residential segment, sales
bookings for the first semester across the three brands – Ayala Land Premier, Community
Innovations and Avida Land – grew in terms of volume and value by 69% and 44%, respectively on
the back of new and exciting product launches. The Company’s efforts to tap the attractive overseas
Filipino market intensified and as a result, direct sales to overseas Filipinos reached P2.8 billion,
representing 34% of total sales and a 15% growth year-on-year. Ayala Land likewise remained on
track to increase its recurring revenues with an aggressive build-up of its leasing portfolio, both in the
shopping center and office segments. Leasing operations grew steadily with average rental rates for
office and shopping centers increasing by 7% and 5%, respectively.
Business Segments
Residential Development accounted for the bulk of revenues at P6.2 billion or 51% of total. Shopping
Centers contributed P2.1 billion or 17%, followed by Support Businesses at P2.0 billion or 16%.
Corporate Business added P395 million or 3% of total while Strategic Landbank Management
provided P173 million or 2%. Visayas-Mindanao followed with P40 million or less than 1%. The
balance of P1.4 billion or 11% was from Equity in Net Earnings, Interest and Other Income.
Residential Development
Residential Development revenues amounted to P 6.2 billion for the first half of 2007, 8% lower than
the P 6.8 billion of 1H06. Avida Land reported a 175% surge in revenues while Ayala Land Premier
(ALP) and Community Innovations (“CII”) registered declines. The drop in ALP and CII’s revenues is
largely attributed to the impact of the standardization in revenue recognition policy implemented
during the second quarter of 2006, which resulted in the acceleration of revenues for ALP and CII at
P 396 million and P 820 million, respectively, partially offset by the deferment of Avida’s revenues
amounting to P 586 million (net impact of P630 million in 1H06).
ALP’s revenues stood at P 3.6 billion for the first half of 2007, 12% less than the same period last
year. High-end lots contributed 38% less year-on-year (y-o-y) at P 822 million, as all units at Sonera
were sold out (take-up at 100% as of end-2006) while sales were slower at Ayala Greenfield Estates
as the new phase with 45 lots was launched only in June. Take-up for Ayala Westgrove Heights
increased to 146 units during 1H07 from 112 units as two new phases with 190 lots were launched
49
The Business
during the period. Revenues from high-end units were flat at P 2.4 billion despite the 78% increase in
units booked to 333 from 187 due to the low construction accomplishment at The Residences at
Greenbelt (TRaG) Manila Tower of only 5%. During the period in review, 171 or 51% of the booked
units were from this project. Meanwhile, revenues from leisure project Anvaya Cove reached P 400
million, 24% more than last year’s P 322 million with higher bookings for lots (34 in 1H07 vs. 30 in
1H06), shares (246 vs. 180) and villas (7 vs. 4).
Revenues for CII were 36% lower y-o-y to P 1.4 billion with booked units 4% lower at 380. The lower
bookings are attributed to lower sales at The Columns at Ayala Avenue (already more than 99% sold)
and The Columns at Legazpi Village. The Aston, the first of four high-rises at Two Serendra was
launched in May with 21% of the 400 units taken-up as of end-June. This project did not contribute to
revenues with construction completion still at 0%. In June, Marquee, CII’s first project in Pampanga
was launched, with 49% of the 362 units already taken-up.
Avida’s revenues were 175% more than 1H06 at P1.2 billion. This was due to 1H07 bookings of 867
units compared to only 198 units in 1H06. Units taken up were actually flat at 1,212 versus 1,215 but
units taken-up during the previous quarters whose booking were delayed because of the
standardization in revenue recognition policy in 2Q06 were booked during 1H07. New projects
launched during the first six months of 2007 include Avida Settings in Cavite (283 units), the fifth
tower of Avida Towers Sucat (264 units) and the third towers of Avida Towers New Manila (354 units)
and Avida Towers San Lazaro (392 units).
NOI for the residential business settled at P1.5 billion, 5% more than the previous year despite the
drop in revenues. This is attributed to the three percentage point improvement in NOI margin to 25%
from 22% brought about by the absence of losses from the sale of One Roxas Triangle units (P11
million NOI in 1H07 versus a net operating loss in 1H06) and improvement in Avida’s NOI margin with
more revenues to cover direct operating expenses (delay in bookings previously due to change in
revenue recognition policy meant less revenues/gross profit to cover direct operating expenses which
remained constant).
Overall demand for residential projects remained strong with the number of units booked during the
first six months of the year reaching 2,022, 69% more than the same period last year. Value of these
units was 44% higher at P7.8 billion versus the P5.5 billion during the comparative period last year.
Close to 3,100 units were launched during 1H07, representing 45% of the full-year target of 6,800
units.
Shopping Centers
Revenues for the first half of the year amounted to P2.1 billion, 9% more than the P1.9 billion
reported during the same period last year. The higher revenues were due to the 3% increase in
average occupancy rate to 95%, as well as the 5% rise in average building rental rates.
In May, operations of the 195,000 square meter TriNoma in Quezon City commenced. Currently, 95%
of the 72,000 square meters building leasable area (excluding the area to be occupied by anchor
tenant Landmark) is leased out/committed. Meantime, the retail component of Bonifacio High Street
in Bonifacio Global City, which was launched in March, is 96% leased out/committed.
Equity in Net Earnings from equitized malls, namely, Alabang Town Center, Pavilion Mall, Bonifacio
High Street and TriNoma was lower at P40 million from P43 million last year due to TriNoma’s startup costs with the mall opening in May.
The first phase of Greenbelt 5 with 13,500 square meters of gross leasable area is scheduled to open
before year-end while construction at 70,000-square meter Q Shopping in Angeles, Pampanga is
proceeding as planned.
50
The Business
Corporate Business
Corporate Business revenues were 22% lower y-o-y at P395 million primarily due to the sale of
PeopleSupport in December 2006 and the absence of lot sales at Laguna Technopark (LTI) which
was sold out in June 2006. New phases from the expansion area at LTI will be made available in the
fourth quarter of the year.
The average occupancy rate of traditional office buildings was slightly lower at 98% from 99%
previously with the transfer of Avida’s offices from the old Makati Stock Exchange Building. This was
however, offset by the 7% rise in average rent to P617 per square meter per month as rental rates
continue to move up. A recent contract at Tower One was for a lease rate of P1,100 per square meter
per month, higher than the P850 per square meter per month for deals done in 1Q07. The average
rental rate for the BPO buildings also moved up to P441 per square meter per month from P408
previously.
NOI declined at a slower pace compared to revenues at 13% to P201 million, following NOI margin
improvement to 51% from 45%, attributed to higher management fees from 36%-owned Ayala Land
Property Partners Corp. (APPCo), the joint venture with MLT Investments Ltd. (Goldman Sachs) and
Filipinas Investments Ltd. (Capmark Financial Group, Inc.), that is developing a number of BPO office
building projects including the UP North Science and Technology Park, Dela Rosa E-Services
Building and the Canlubang BPO campus.
To date, construction has started on the first two buildings at the UP North Science and Technology
Park. The first building with 17,000 square meters has been fully leased out while the lease on
second building with 10,000 square meters is expected to be finalized within 3Q07, in time for the
target completion date by end-2007. For the Dela Rosa E-Services building, about half of the 47,000
square meter gross leasable area (GLA) is under negotiation with an anchor tenant and is expected
to be finalized within the year. Groundbreaking on the Canlubang BPO Campus (10 buildings with
87,800 square meters) is scheduled within the third quarter and the first building is targeted to be
completed in 2008.
Recently, Ayala Land signed a joint venture with Manila Jockey Club, Inc. for the construction of two
BPO buildings with a total GLA of 42,500 square meters at the site of the former San Lazaro
racetrack.
Revenues of Strategic Landbank Management stood at P173 million during the first six months of
2007, 33% lower than the same period in 2006. This was despite booked units from overrides
reaching 78, three times more that 1H06’s 24 units. Booked units included 33 from The Columns at
Legazpi Village where construction completion remains minimal. NOI margin was lower at 30% from
41% previously with no contribution from higher-margin The Columns at Ayala Avenue in 1H07
(already sold out).
Equity in net earnings from Ayala Land’s 20% effective stake in Fort Bonifacio Development
Corporation (“FBDC”) amounted to P246 million, a turnaround from the P12 million loss realized in
1H06. This was due to the robust sale of lots at Bonifacio Global City (BGC) with a total area of
37,000 square meters, from only 4,000 square meters during the same period last year. Selling prices
also ranged from P52,000 to P175,000 per square meter from only P50,000 last year.
The Company continues to prime its three strategic landholdings. Within Makati, the redevelopment
of Ayala Center is ongoing with the construction of Glorietta 5 which will have office as well as retail
components. Meanwhile, the hotel complex project in partnership with Kingdom Hotel Investments
will start development in 4Q07. At BGC, Ayala Land signed in April a memorandum of agreement with
the Philippine Stock Exchange and FBDC for the construction of a headquarter office building. In
Canlubang, development is underway for a 3Q07 launch of Nuvali.
51
The Business
Visayas-Mindanao
Visayas-Mindanao’s revenues for 1H07 amounted to P40 million, slightly above half of the P76 million
reported in 1H06. The decline is due to the drop in the number of booked units from 79 to 57. Alegria
Hills, Ayala Land’s first residential project in Cagayan de Oro was only launched in June 2007 and did
not yet contribute to revenues. As of end-June, 15% of the 95 high-end lots were taken-up.
Affiliate CHI, 47% owned by Ayala Land, posted a 44% growth in revenues to P692 million, with net
income up by 36% to P155 million in 1H07. The last 8 units from the 201 units of the first two phases
of Amara in Cebu were booked in the first half and a new phase is scheduled to be launched by
September. At Ayala Center Cebu, the average building rent was 9% higher y-o-y, offsetting the
impact on earnings of the slightly lower occupancy rate of 96% from 98%. The first phase of the
mall’s expansion of 5,800 square meters started operations last June 29. Meanwhile, a total of 8 lots
were sold at CPVDC Asiatown IT Park in 1H07, up from only two in 1H06. As a result, equity in net
earnings from CHI and CPVDC amounted to P86 million, 51% more than the P57 million they
contributed during the same period last year.
Support Businesses
Ayala Land’s Support Businesses, comprised of Hotels, Construction, Property Management and
Waterworks generated revenues of P2.0bn, 13% lower than 1H06’s P2.3 billion, largely due to the
drop in hotel revenues following the sale of Oakwood Premier Ayala Center to Ascott Residence
Trust in March 2007, as well as lower construction revenues.
Ayala Land’s current hotel business, comprising of Hotel InterContinental Manila and Cebu City
Marriott Hotel, generated revenues of P682 million in 1H07, 22% lower than the P877 million reported
in 1H06 which included revenues from Oakwood. Consequently, NOI was 23% lower to P242 million
as NOI margin was maintained at 36%. Average occupancy rate of Hotel InterContinental Manila
surged to 82% from the year-ago 59% with refurbishment completed in late 2006. Revenues per
Available Room (REVPAR) was also higher at P3,923 versus P2,327. Marriott’s occupancy rate
declined to 75% from 85% but was still higher than the Cebu average of 59%. REVPAR was also
above industry at P2,598 versus P1,639.
Construction revenues, net of inter-segment eliminations, contributed P663 million, 13% lower y-o-y
primarily due to deferred revenue recognition on Greenbelt 5 which is dependent on the mall’s start of
operations. Before inter-segment eliminations, MDC managed to grow its revenues by 5% to P2.4
billion due to newly awarded projects such as St. Luke’s Hospital, Honda Cars showroom at BGC,
and BPO projects such as UP and Dela Rosa Tower. Meanwhile, MDC’s net income declined by 49%
to P89 million given lower NOI margin due to the larger revenue contribution of Ayala Land contracts
which carry lower margins compared to third-party contracts.
Property Management revenues, net of inter-segment eliminations, was 10% higher y-o-y at P339
million with the contribution from the Citibank and other new contracts in 1H07. However, NOI was
flat at P151 million due to training expenses with organizational build-up in support of projected
increase in facilities to be managed.
Equity in Net Earnings of Investees, Interest, Fees, Investment and Other Income
Equity in Net Earnings from Investees grew more than four times to P374 million from P88 million,
largely due to the substantially higher contribution from Ayala Land’s corporate investment vehicles in
BGC, as well as higher earnings of CHI and ACC.
The contribution of FBDC reached P246 million from a previous loss of P12 million. Sales accelerated
at Bonifacio Global City with a total of 37,000 square meters sold in 1H07, from only 4,000 square
52
The Business
meters in 1H06. Selling prices were also higher at P52,000 to P175,000, translating to
accommodation values of P9,000 to P12,000, compared to P8,000 during the first half of 2006.
Meanwhile, Equity Earnings from CHI/CPVDC were 51% higher at P86 million from P57 million, due
to higher bookings and construction accomplishment at Amara as well as higher lot sales at CPVDC’s
Asiatown IT Park.
For the shopping business, Alabang Town Center accounted for P52 million, 24% more than the
previous year, while Pavillion Mall’s contribution was flat at P1 million. TriNoma, which opened in
May, incurred losses of P13 million relating to start-up costs. The balance of Equity Earnings of P2
million was from ALI Property Partners Corp. (APPCo), the 36%-owned joint venture formed for the
development of the BPO office building business.
Interest, Fees, investment and other income amounted to P1.0 billion from P879 million a year ago.
Bulk or P667 million was accounted for by proceeds from the sale of MPVI shares.
Expenses
For the first six months of 2007, Total Expenses reached P8.9 billion, 8% lower y-o-y, largely due to
the drop in Cost of Real Estate and Hotels to P7.2 billion from P8.1 billion previously as 1H07
expenses no longer included Oakwood. General and Administrative Expenses were steady at P1.2
billion while Interest and Other Charges were higher at P501 million from P418 million due to higher
average daily balance of loans. Provision for Income Tax was 20% lower at P770 million with the
higher income subjected to a lower tax rate (before minority interest) from the sale of the MPVI
shares compared to the Bridgebury Corporation shares in 1H06.
Financial Condition
The company’s balance sheet continues to be healthy with Current Ratio at 1.71:1. As of end-June
2007, Cash and Equivalents stood at P8.2 billion, lower than the end-2006 level of P9.5 billion with
the payment of P3 billion worth of bonds in 2Q07. Total Borrowings were at P10.0 billion, from P13.1
billion as of December last year, translating to a Debt-to-Equity Ratio of 0.24:1 and Net Debt-to-Equity
Ratio of 0.04:1.
DIVIDEND POLICY
Dividends declared by Ayala Land on its shares of stock are payable in cash or in additional shares of
stock. The payment of dividends in the future will depend upon the earnings, cash flow and financial
condition of Ayala Land and other factors.
Special cash dividends are declared depending on the availability of cash, taking into account Ayala
Land’s project and capital expenditures and the progress of its ongoing asset rationalization program.
Cash dividends are subject to approval by Ayala Land’s Board of Directors but no stockholder
approval is required. Property dividends which may come in the form of additional shares of stock
are subject to approval by both Ayala Land’s Board of Directors and Ayala Land’s stockholders. In
addition, the payment of stock dividends is likewise subject to the approval of the SEC and PSE.
Other than the restrictions imposed by the Corporation Code of the Philippines, there is no other
restriction that limits Ayala Land’s ability to pay dividends on common equity.
DESCRIPTION OF PROPERTY
The following table provides summary information on Ayala Land’s landbank as of December 31,
2006. Properties are wholly owned and free of liens unless noted.
53
The Business
Location
Hectares
1
Makati
2
Taguig
3
Alabang
4
Quezon City
5
Parañaque / Manila / Pasay
Las Piñas
% to Total Ayala Land landbank
54
60
18
52
3
130
1.24%
1.38%
0.42%
1.20%
0.07%
2.99%
317
7.30%
2,283
329
99
46
71
2,828
52.57%
7.58%
2.28%
1.06%
1.63%
65.12%
121
23
25
62
297
528
2.79%
0.53%
0.58%
1.43%
6.84%
12.16%
201
21
192
60
196
4.63%
0.48%
4.42%
1.38%
4.51%
Metro Manila
6
Laguna
7
Cavite
8
Batangas
9
Rizal
10
Quezon
Calabarzon
11
Bulacan
12
Pampanga
Naga
Cabanatuan/ Baguio
13
Bataan
Other Luzon Area
14
Bacolod
Iloilo
15
Cebu
Davao
16
Cagayan De Oro
Visayas/Mindanao
TOTAL
670
15.43%
4,343
100.00%
(1)
Makati includes sites of Mandarin Hotel (1.6 has.) and Peninsula Hotel (2.0 has.) which are 50% owned through AHI,
and the remaining area at Roxas Triangle (0.5 ha.) which is 50% owned; 1.37 has. of which is mortgaged to BPI in
compliance with the BSP ruling on DOSRI; 0.16 has. mortgaged with the Government Service Insurance System
(“GSIS”) to secure surety bonds in favor of the Bases Conversion Development Authority (“BCDA”); 1.75 has. subject
of a leasehold rights to secure Makati Property Venture Inc.’s loan with Deutsche Investitions-Und
Entwicklungsgesellschaft MBH.
(2)
Taguig includes 9.8-ha. site of Market! Market! under lease arrangement with BCDA; 9-ha. site of Serendra which is
under joint development agreement with BCDA; 44 has. in Taguig is owned through FBDC.
For Market! Market!, the lease agreement with the BCDA covers a period of 25 years (renewable for another 25 years)
and involves an upfront cash payment of P700.0 million and annual lease payments with fixed and variable components.
For Serendra, the joint development agreement with BCDA involves an upfront cash payment of P700.0 million plus a
guaranteed revenue stream totaling P1.1 billion over an 8-year period.
(3)
Alabang pertains to the 17.6-ha. Alabang Town Center which is 50% owned through ACC, 3.7 has. of which is subject of
a mortgage trust indenture as security for ACC’s Standby Letter of Credit with Rizal Commercial Banking Corporation
(“RCBC”), term loans with Security Bank Corporation and Land Bank of the Philippines (Land Bank).
(4)
Quezon City includes 17 has. under lease arrangement with University of the Philippines and the 13-ha. site of Tri Noma
which is under lease arrangement with the Department of Transportation and Communication. Tri Noma is 49% owned
by Ayala Land. The lease agreement with UP covers a period of 25 years while the lease contract with the DOTC
covers a period of 50 years until 2047.
(5)
Parañaque/Manila/Pasay includes 2 has. (under development) which are under joint venture with Manila Jockey Club,
Inc. and 0.3-ha. site of Metro Point which is 50% owned through ALI-CII Development Corp.
54
The Business
(6)
Laguna includes 1,315 has. which are 70% owned through Aurora Properties, Inc. and Vesta Holdings, Inc.; also
includes 376 has. which are 65% owned through Ceci Realty, Inc.; 158 has. which are under a 50-50% joint venture
with Greenfield; 9 has. in Laguna Technopark, Inc. which is 61% owned by Ayala Land; and 3-ha. site of Pavilion Mall
which is under 27-year lease arrangement with Extra Ordinary Group, with an option to renew every 5 years thereafter
(lease payment is based on a certain percentage of gross income). 6.92 has. are mortgaged to Land Bank as a security
for Avida’s term loan; 11.6 has. are subject of a mortgage trust indenture securing Jexim loans of Avida with China
Banking Corporation and Banco De Oro Universal Bank; 42.3 has. are subject of an mortgage trust indenture securing
Ayala Greenfield’s International Exchange Bank loan.
(7)
Cavite includes various properties where Avida has the following effective stakes: 61 has. (90%), 22 has. (79%), and 1.8
has. (75%)
(8)
Batangas includes 9.5 has. in Lipa which is 80% owned and 8.2 has., also in Lipa, which is 60% owned
(9)
Rizal includes a 40-ha. Antipolo property which is 60% effectively owned
(10)
Quezon includes a 5.63 has. of property which is mortgaged with Land Bank as a security for term loan of Avida.
(11)
Bulacan includes 103 has. Which are 60% effectively owned
(12)
Pampanga includes 13 has. Which are 80% effectively owned
(13)
Bataan property (297 has.) pertains to the site of Anvaya Cove which is under joint development agreement with
SUDECO.
(14)
Bacolod includes 100 has. which are 80% effectively owned.
(15)
Cebu includes about 13 has. in Cebu Business Park (including Ayala Center Cebu) which is 47% owned through CHI;
0.62-ha. hotel site owned by AHI and CHI; 9 has. in Asiatown IT Park which is owned by CPVDC which in turn is 76%
owned by CHI; and 33 has. in Amara project, (66% owned by CHI) which is under joint venture with Coastal Highpoint
Ventures, Inc. An 8.84-ha. Property (within the Cebu Business Park) which houses the Ayala Center Cebu is subject of
a mortgage trust indenture securing term loan with BPI; 0.62 has. is subject of a mortgage trust indenture securing Cebu
Insular Hotel Company Inc.’s term loan with Deutsche Investitions- und Entwicklungsgesellschaft MBH.
(16)
Cagayan de Oro includes 180 has. Which are 65% effectively owned.
Property Acquisitions
With 4,343 hectares in its landbank as of end-2006, Ayala Land believes that it has sufficient
properties for development at least for the next 25 years.
There is currently no major acquisition being contemplated by Ayala Land but it is open to acquiring
properties which it deems strategic. Ayala Land’s preferred mode of acquisition, going forward, would
be through joint ventures with landowners. Meanwhile, Ayala Land continues to assess its
landholdings to identify properties which no longer fit its overall business strategy and hence, can be
disposed of.
PROJECT AND CAPITAL EXPENDITURES
For the first half of 2007, Ayala Land spent a total of P6.9 billion for project and capital expenditures,
38% more than the P5.0 billion spent in 1H06. This represents 43% of the full year 2007 budget of
P16.2 billion.
Residential Development projects accounted for the largest share of capex at P3.3 billion or 48% of
total. Shopping Centers used 37% or P2.6 billion of the amount spent while Corporate Business
projects, mainly Dela Rosa E-Services Building and the UP North Science and Technology Park,
utilized P450 million or 7% of total. Ayala Land’s budgeted consolidated project and capital
expenditures for 2007 are broken down as follows:
2007 Project and Capital Expenditures
(Based on a budgeted amount of P16.2 billion)
Shopping Centers
24%
Corporate Business
6%
Residential Developments
55%
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The Business
2007 Project and Capital Expenditures
(Based on a budgeted amount of P16.2 billion)
5%
Visayas-Mindanao
6%
Support Businesses
2%
Corporate Capex
2%
Total
100%
The budgeted amount for project and capital expenditures in 2007 is being funded from existing cash
and cash from operations, pre-selling, additional borrowings and proceeds from the sale of non-core
assets and installment receivables.
ENVIRONMENTAL COMPLIANCE
Ayala Land incurs no material costs in relation to compliance with environmental laws and
regulations. Each of Ayala Land and its subsidiaries, as a matter of corporate policy, either has
secured or seeks to secure all relevant and applicable Government approvals such as environmental
compliance certificates or certificates of non-coverage, development permits, and licenses to sell, as
part of the normal course of their business.
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The Business
II.
FINANCIAL SERVICES
BANK OF THE PHILIPPINE ISLANDS
Ayala is engaged in banking through its affiliate BPI. Ayala, directly and indirectly, held approximately
33.6% of BPI as of June 30, 2007. Other major shareholders of BPI as of said date are Development
Bank of Singapore (“DBS”) (20.4%) and the Roman Catholic Archdiocese of Manila Group (8.6%).
As of the date of this Prospectus, BPI is the second largest commercial bank in the Philippines in
terms of total assets, second overall in deposits, loans and capital. It has the biggest market share in
trust banking. The bank also enjoys a significant presence in consumer lending, asset and fund
management, corporate finance, securities distribution and insurance business.
BPI provides a wide range of corporate and commercial banking products and services such as
credit, trade-related services, cash management services and financial advice to large- and mediumsized corporations and institutions in the Philippines. It provides traditional short- and long-term
financing as well as products and services such as trade acceptances and bills of exchange for such
customers.
BPI is among the leading banks in the consumer banking business in the Philippines. Its services
include mortgage lending, automobile financing, deposit taking, electronic banking, remittance and
foreign exchange, credit card operations and private banking. BPI has a network of 896 branches,
including 207 kiosks that are typically located in shopping malls, supermarkets and transport stations.
BPI is a recognized leader in electronic banking, having introduced most of the firsts in the industry,
such as automated teller machines (“ATMs”), a point-of-sale debit system, kiosk banking, phone
banking, Internet banking and mobile banking. BPI has 1,471 ATMs and accounts for the biggest
share in the BPI ExpressNet consortium of 2,752 ATMs.
BPI manages corporate, institutional and individual trust and investment accounts and common trust
funds. Total funds managed as of June 30, 2007 amounted to P232.0 billion.
PRINCIPAL SUBSIDIARIES
The bank’s principal subsidiaries are listed below.
1. BPI Family Savings Bank, Inc. serves as BPI’s primary vehicle for retail deposits, housing loans
and auto finance. It has been in business since 1985. It merged with Shenton Realty Corporation
in December 2004.
2. BPI Capital Corporation is an investment house concentrating in corporate finance and the
securities distribution business. It began operations as an investment house in December 1994.
It wholly owns BPI Securities Corporation, a stock brokerage company with a seat in the PSE.
3. BPI Leasing Corporation is a quasi-bank concentrating in lease finance. It was originally
established as Makati Leasing and Finance Corporation in 1970. Its quasi-banking license was
inherited from the merger with Citytrust Investment Phils., Inc. in May 1998.
4. BPI Direct Savings Bank is a savings bank focused on providing internet and mobile banking
services to its customers. It started operating as such on February 17, 2000 upon approval of the
BSP.
5. BPI International Finance Limited, Hong Kong is a deposit taking company in Hong Kong. It was
originally established in August 1974.
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The Business
6. BPI/MS Insurance Corporation is a non-life insurance company formed through a de facto merger
of FGU Insurance Corporation and FEB Mitsui Marine Insurance Company on January 7, 2002.
7. Ayala Life Assurance Inc. is a life insurance company acquired by BPI through its merger with
Ayala Insurance Holdings Corp. (“AIHC”) in April 2000. It was originally established in 1933 as
Filipinas Life Assurance Co. and has a 100% owned pre-need subsidiary called Ayala Plans.
BPI merged with Far East Bank and Trust Co., Inc. and AIHC in 2000.
In September 2005, BPI acquired 92% of the share capital of Prudential Bank, Inc. (“Prudential
Bank”). BPI merged with Prudential Bank on December 29, 2005, pursuant to which approximately
ten million BPI shares were issued to the 8% Prudential Bank minority shareholders.
In October 2005, the stockholders of Universal Malayan Reinsurance (“UMRe”) and National
Reinsurance Corporation of the Philippines (“NRCP”) approved the plan of merger of UMRe and
NRCP, with NRCP as the surviving entity.
Listed on the PSE since 1971, BPI had a market capitalization of P179.8 billion as of September 30,
2007.
FINANCIAL CONDITION AS OF JUNE 30, 2007
BPI’s balance sheet highlights for end-June 2007 and end-2006 are shown below:
In P Millions
Assets
Deposits
Loans (Net)
Capital
June 2007
2006
592,635
480,003
254,666
65,445
581,970
467,076
243,191
64,438
Total resources as of end-June 2007 reached P592.6 billion which is P10.7 billion higher than end
2006 level of P582.0 billion. Increase in resources was caused by deposits growth of P12.9 billion as
demand and savings deposits grew by P7.9 billion (10.9%) and P5.1 billion (4.1%), respectively. Bills
payable was also up by P1.6 billion or 28.3% due to additional deposit substitute transactions.
Manager’s checks and demand drafts outstanding increased by P466 million due to new manager’s
checks issued. These increases were partially negated by the drop in deferred credits and other
liabilities of P4.8 billion or 22.4% due to the P5.1 billion payment of regular and cash dividends
declared in October and November last year. Due to BSP and Other Banks also contracted by P502
million due to lower collection of taxes and the remittance of BSP Supervision and Examination fees.
Accrued taxes, interest and other expenses declined by P588 million basically on payments of
accrued expenses and taxes, and lower level of accrued interest on deposits.
On capital funds, the surplus account grew by P3.3 billion or 10.7% mainly due to the first semester’s
net income of P5.7 billion, reduced by the P2.4 billion regular cash dividend declared in April 2007.
Reserves declined by P2.1 billion on account of the sell down of securities in the first semester.
Translation adjustment debit balance on foreign currency denominated assets was up by P131 million
on account of the stronger peso vis-à-vis the US dollar. Minority interest in subsidiaries was up by
P136 million due to the higher income of the bank’s subsidiaries.
On the asset side, net loans were up by P11.5 billion due to increased loan releases to corporate
clients as well as new housing and auto loan bookings. Trading securities dropped by P8.1 billion due
to some profit taking activities in the first semester, while the decline of P12.4 billion in investment
securities - held-to-maturity (HTM) was partly due to the reclassification of some HTM to available-forsale in accordance with BSP guidelines. Cash and other cash items were likewise down by P2.6
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The Business
billion or 22% due to the lower cash requirement for the period as compared to year end. The funds
released from the aforementioned assets were lent out to other banks and the BSP, hence the P12.0
billion increase in interbank loans receivable and securities purchased under agreements to resell;
deposited with the BSP thus increasing due from BSP by P5.2 billion; and placed with local and
foreign banks thereby resulting in a P3.1 billion rise in due from other banks. Net equity investments
were higher by P1.9 billion or 204.3% due to the investment in BPI Europe, Plc in April 2007. BPI was
granted authority by the Financial Services Authority (FSA) to set up a wholly owned banking
subsidiary in London. Assets attributable to insurance operations improved by P1.4 billion or 7.1%
following new policy sales, good investment portfolio and the re-investment of realized investment
income. Other resources on the other hand, were down by P928 million due to lower sales contract
receivables, account receivables, accrued interest and fees receivables and the set-up of allowance
for non-credit write-offs. Bank premises, furniture, fixtures & equipment also dropped by P888 million
mainly on account of the reclassification of certain ex-Prudential Bank assets to investment property,
which in turn grew by P775 million.
Loan to deposit ratios for end-June 2007 and end-2006 were 53% and 54%, respectively. BPI’s liquid
asset portfolio consisted largely of non-risk government securities and cash/other liquid accounts to
cover primary reserve requirement for deposits as well as to maintain a significant level of secondary
reserves to fund any potential increase in loan demand.
RESULTS OF OPERATIONS FOR FIRST SEMESTER 2007
In P Millions
Jan-June
2007
Net Interest Income
Non-Interest Income
Impairment Losses
Interest Expense
Net Income
2006
10,248
7,130
959
5,792
5,715
9,562
5,192
728
6,584
4,592
First semester 2007 net income stood at P5.7 billion, P1.1 billion or 24.4% ahead than last year’s
P4.6 billion. Revenues increased by P2.6 billion or 17.8%. This is the first time since 1998 that the
bank achieved a revenue growth higher than 15%. Revenue growth came from the increments of
P686 million in net interest income and P1.9 billion in other income.
The 7.2% rise in net-interest income was mainly due to a 10% expansion in average asset base.
Interest income dropped by P106 million but interest expense recorded a bigger reduction of P792
million.
•
Income on deposit with banks and available-for-sale securities improved by P359 million and
P325 million due to increased average balances. On the other hand, income on held-to-maturity
and trading securities were down by P433 million due to decreased balances, while income on
loan and advances ended lower by P398 million due to lower interest yields. Correspondingly, the
lower level of interest income resulted in a P42 million drop in GRT.
•
Interest expense on deposits was lower by P747 million on lower peso deposits cost. Interest
expense on bills payable and other borrowings likewise diminished by P45 million due to the
lower cost of issuing deposit substitutes.
The strong performance of other income was attributed largely to the insurance subsidiaries. These
subsidiaries delivered a P1.0 billion increase on account of higher net premiums and investment
returns to include a P416 million gain on the sale of a property. Other operating income also
contributed P 640 million or 26.6% from higher profits on assets sold, rental income, and stock
brokerage fees. Income from foreign exchange trading and trading securities likewise rose by P457
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The Business
million or 34.3% on realized securities trading profits. Consequently, GRT was higher by P249 million
or 88.3%.
Impairment losses were at P959 million or P232 million higher than last year on accelerated loan loss
provisioning.
Other expenses reached P9.4 billion, P1.3 billion or 16.4% ahead of last year’s P8.0 billion.
Compensation & fringe benefits were higher by P475 million or 13.6% mainly due to salary increases
and benefits related expenses. Occupancy and equipment-related expenses also went up by P143
million due to higher depreciation costs. Other operating expenses were up by P704 million or 29.6%
coming from prior period taxes paid, higher asset acquired expenses, regulatory costs and
miscellaneous expenses.
Current income tax increased by P154 million or 14.4% on account of higher taxable income.
Deferred income tax rose by P269 million or 115% due to basically due to set-up related to accounts
with timing differences. Minority interest was also higher by P63 million or 76.1% as insurance
subsidiaries posted higher income.
Key Performance Indicators
The following ratios, applied on a consolidated basis, are used to assess the performance of the bank
and its majority owned subsidiaries:
Return on Equity (%)
Return on Assets (%)
Net Interest Margin (%)
Operating Efficiency Ratio (%)
Capital Adequacy Ratio (%)*
June 30, 2007
17.5
2.0
4.2
53.9
16.8
June 30, 2006
15.5
1.8
4.5
54.5
18.1
* Includes both credit and market risks
Return on equity (ROE), computed as: net income divided by average equity, improved by 2.0% due
to higher income over same period last year. Return on assets (ROA), net income divided by average
assets, also improved from 1.8% to 2.0%. These indicated the bank’s efficient utilization of its capital
and resources to generate income.
Net interest margin (NIM), computed as: net interest income divided by average interest bearing
assets, narrowed by 23 basis points due to the thinner spreads derived from the bank’s earning
assets with the softer prevailing interest rates then.
Operating efficiency ratio (cost to income), computed as: operating expenses divided by total
revenues, slightly improved by a 0.6%. This ratio measures the effective use of expenses in
generating income.
Capital Adequacy Ratio (“CAR”), computed as: total qualifying capital divided by total risk-weighted
assets, measures the ability of the bank’s capital funds to cover its various risks. CAR as of June 30,
2007 was lower by 1.3% vs. June 30, 2006 in view of higher level of risk weighted assets. BPI’s CAR
however is still more than BSP’s minimum requirement of 10%. The high level of profitability supports
the bank’s strong capital position even at consistently high dividend pay-out ratio.
MATERIAL EVENTS AND UNCERTAINTIES
The Bank has nothing to report on the following:
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The Business
•
Any known trends or any known demands, commitments, events or uncertainties that will result in
or that are reasonably likely to result in the registrant’s liquidity increasing or decreasing in any
material way.
•
Any events that will trigger direct or contingent financial obligation that is material to the company,
including any default or acceleration of an obligation.
•
Other material off-balance sheet transactions, arrangements, obligations (including contingent
obligations), and other relationships of the company with unconsolidated entities or other persons
created during the reporting period other than those mentioned above.
•
Material commitments for capital expenditures.
•
Any known trends, events or uncertainties that have had or that are reasonably expected to have
a material favorable or unfavorable impact on net sales or revenues or income from continuing
operations.
•
Events that will cause material change in the relationship between costs and revenues (such as
known future increases in cost of labor or materials or price increases or inventory adjustments).
•
Any significant elements of income or loss that did not arise from the registrant’s continuing
operations.
•
Any seasonal aspects that had a material effect on the financial condition or results of operations.
CASH DIVIDENDS
Cash dividends declared and paid by BPI during the six months ended June 30, 2007 and June 30,
2006 are as follows:
Cash Dividends Declared
Amount Declared
Amount Paid
January to June 2007
P1.90 per share
P5.14 billion
January to June 2006
P0.75 per share
P2.03 billion
COMPETITION
The Philippine banking industry has seen a significant increase in the number of commercial banks,
especially since the liberalization of operations by foreign banks. The number of commercial banks
increased from approximately 30 prior to liberalization to more than 50. However, as of June 30,
2007, the number of commercial banks had declined to 38 (according to BSP Web site) as a result of
mergers and closures. Competition has remained intense despite the industry consolidation.
Loan requirements of the corporate sector are still predominantly for working capital. Despite the
relatively weak demand for loans from this sector, this sector is the main focus of foreign banks. As
such, loan pricing can be very competitive, resulting in narrower margins for this sector. A number of
foreign banks though as well as most domestic banks, have entered the growing consumer market
where BPI is major player. BPI believes that its competitive advantages include its extensive
experience in efficient management of operations such as loan origination, credit approval, collection
and asset recovery activities.
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The Business
III.
TELECOMMUNICATIONS
GLOBE TELECOM, INC.
Ayala conducts its telecommunications business through its affiliate, Globe Telecom, Inc. (“Globe”).
Globe is a leading provider of wireless communications services in the Philippines. With
approximately 18.1 million wireless subscribers as of June 30, 2007, Globe accounts for
approximately 38% of the total wireless subscribers in the country. Globe’s shares are listed on the
PSE and included in the Philippine composite index. As of September 30, 2007, Globe had a market
capitalization of P194.2 billion.
As of June 30, 2007, Ayala owned 33.4% of Globe’s outstanding common shares while Singapore
Telecom International (“STI”), a wholly owned subsidiary of Singapore Telecom, owned 44.5%.
Asiacom Philippines, Inc., a holding company that currently owns all of Globe’s outstanding preferred
shares, is 60% owned by Ayala and 40% by STI.
Wireless Business
Globe offers its wireless services including local, national long distance, international long distance,
international roaming and other value-added services through three brands: Globe Postpaid, Globe
Prepaid and Touch Mobile (“TM”).
Globe Postpaid is the postpaid brand of Globe. This includes all postpaid subscription plans such as
G-Plans and consumable G-Flex Plans, Platinum (for the high-end market), and GlobeSolutions (for
corporate and business needs).
Globe Prepaid and TM are the prepaid brands of the Globe Group. Each brand is positioned at
different market segments. Globe Prepaid is focused on the mainstream, broad market while TM is
focused on value-conscious, working class market. Additionally, Globe has customized services and
benefits to address specific market segments, each with its own unique positioning and service
offerings.
Globe also provides its subscribers with mobile payment and remittance services under the GCash
brand. Now on its third year, this service enables subscribers to perform international and domestic
remittance transactions, pay annual business registration fees, income taxes for professionals, utility
bills, avail of micro-finance transactions, donate to charitable institutions, and buy Globe prepaid
reloads.
To cater to a wide variety of prepaid subscribers, Globe provides various top-up facilities for its
subscriber’s convenience. Globe Prepaid and TM subscribers can reload airtime value or credits
using various reloading channels.
Subscribers can purchase Globe Prepaid Call and Text cards in P100, P300 and P500
denominations while TM Call and Text cards are available in P50, P100, and P300 denominations.
They can also utilize Globe AutoloadMAX, Globe’s over-the-air (OTA) reload channel, which offers
the most affordable and flexible load credits in P1 increments from P10 to P150 for TM subscribers,
and P15 to P150 for Globe Prepaid subscribers. Globe AutoLoadMAX currently has over 561
thousand transacting retailers nationwide. Subscribers can also top up using bank channels like
ATMs, credit cards, Internet banking and Bank of the Philippine Islands 24 Hour Call Center and
Express Phone, as well as through E-POS (electronic point-of-sale) terminals located at retail outlets
and business centers.
A consumer to consumer top up facility, Share A Load, is also available whereby Globe Prepaid and
TM subscribers can share prepaid load credits among themselves in denominations of P1 to P150 (in
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The Business
P1 increments). In addition, Globe Postpaid subscribers can Share A Load to prepaid subscribers in
P1 to P150, P300 and P500 denominations. Another reloading channel available is GCash2Load,
where Globe Postpaid, Globe Prepaid and TM subscribers can top-up their own or another
customer’s mobile phone by converting their GCash to prepaid load credits in increments of P1 from
P10 to P24 and increments of P25 from P25 to P150. Denominations of P300, P500 and P1,000 are
also available. Moreover, current GCash2Load promotions include a 10% GCash rebate on all
GCash2Load transactions.
Wireline Business
Innove Communications, Inc. (“Innove”), a wholly owned subsidiary, provides wireline voice
communications, private data networks and Internet services to individuals and enterprises in the
Philippines under the Globelines and GlobeQuest brands.
Under the Globelines brand, Innove provides state-of-the-art digital communications technologies to
homes and small and medium-sized enterprises through the following products and services:
Globelines is a wireline voice communications service offering that includes local, national long
distance, international long distance and other value-added services, through its postpaid, prepaid
and payphone lines. With the availability of postpaid or prepaid options, subscription to Globelines
comes with standard features and value-added services such as International Direct Dial (“IDD’),
National Direct Dial (“NDD”), Phone Lock, Caller ID, Call Waiting, Multi-Calling, Call Forwarding,
Voice Mail, Duplex Number, Hotline and Special Numbers.
Globelines Business Connections is a bundled telephone package to help clients manage their
operations and enjoy big business efficiency on a small business overhead. There are various
Globelines Connections packages suitable for clients requiring single and/or multiple lines.
Globelines subscribers with personal computers can also surf the Internet and have their own Webbased email by using Globelines Dial-up Internet service. Users of this service pay only for the actual
minutes used at a low flat rate of P0.33 per minute.
Globelines Broadband is a high speed Internet connection that keeps subscribers online all the time,
getting instant access to communication, knowledge and entertainment. Application-based packages
such as Express Unlimited and Explore are designed to cater to various Internet needs. Globelines
Broadband subscribers may also activate their VoIP account and use Globelines Broadband VoIP
softphone service to call overseas for a special rate of US$0.05/minute.
Globelines Worldpass Prepaid is the first prepaid internet card in the market that allows the user to
access the internet with total mobility, flexibility and convenience. The user may choose his access
point - via dial-up using any landline, mobile access via WiFi from any WiZ hotspots, or broadband
connection via Globelines Broadband kiosks. It is a pay per use internet access which comes in
denominations of P20, P50, and P100 which expires 15 days after first use. Worldpass Prepaid
vouchers can be purchased at any Globelines Payments and Services (GPS) Centers, Globe
business centers, and other retail outlets.
Globelines Worldpass Postpaid is also available for subscribers who wish to access the internet
anytime and anywhere through Wi-Fi, Broadband or Dial-up using just one account. Subscribers can
use a laptop, PC, PDA or mobile phone and surf wirelessly at any WiZ Hotspot, dial-up to the internet
using any landline in the country or connect via Broadband using a Globelines Broadband account.
Subscribers can even access their accounts when they travel to international destinations through
connectivity with iPass. All these are possible with just one username and password. Postpaid plans
are available with a consumable monthly service fee of P250 (VAT included).
Globe1 is a one-card for all communications needs. This PIN-based prepaid card service allows
customers to make local, domestic and international calls using Globelines landline (postpaid and
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The Business
prepaid), Globelines Payphone, Globe and TM. This versatile and convenient product is offered in
denominations of P100 and P300 and is available in Globe’s GPS Centers, Globe business centers
and prepaid card dealers.
Under the GlobeQUEST brand, the company offers end-to-end solutions for corporate clients based
on value-priced, high-speed data services over a nationwide broadband network. This includes
domestic and international data services, wholesale and corporate internet access data center
services and segment-specific solutions customized to the needs of vertical industries. Some of the
products and services offered are as follows:
GlobeQUEST Broadband Internet offers clients a complete range of Internet services that operate at
broadband speeds using Globe’s Internet backbone which, at more than 2 Gbps and growing, is one
of the largest in the Philippines. Some of the services currently being offered are:
•
Digital Subscriber Line (DSL) – This service lets subscribers access the Web at ultra-high speed
connection for both downloads and uploads using Globe’s DSL access network and growing
Internet backbone. Various access packages are available to ensure the service is cost-efficient
and fits different corporate needs and budgets.
•
Internet Direct – This offers guaranteed service levels delivered over leased line facilities and is
especially offered to those corporate clients running mission-critical applications.
•
Broadband Internet Zone (BIZ) – This is GlobeQuest’s broadband-to-the-room Internet service
which provides secure, reliable and convenient high-speed broadband Internet access to
transient business travelers and/or tenants of high-density buildings such as hotels,
condominiums and other multi-tenant establishments. This service also utilizes wireless Internet
access in convenient public locations and hotspots to provide mobile workers with Internet
connectivity outside their offices.
•
GIX Burstable – This bandwidth on-demand service offers wholesale Internet access with a
payment scheme that is based on average use only. Customers are allowed to start with a
minimum subscription of 5 Mbps burstable to 45 Mbps depending on the actual growth of their
internet traffic. Primarily used by wholesale customers and large enterprises, this service provides
the pricing flexibility that supports the ever-changing business requirements of these companies.
•
Freeway IP – This service is GlobeQuest’s managed international private leased circuit to the
USA. To ensure cost-efficiency for businesses, Globe’s package allows customers to pay a fixed
monthly charge regardless of actual usage and increase bandwidth when needed.
•
Universal Access services – These are subscription plans available for corporate users, which
enables WiFi and dial up access through a single user account.
GlobeQuest WIZ (Wireless Internet Zone) is Innove’s brand for its WiFi (Wireless Fidelity)-enabled
network providing broadband access on 802.11b/g-enabled strategic locations called “hotspots” such
as airports, hotels, coffee shops and business lounges. It covers more than 577 locations to date,
including “hotzones” in major malls in Metro Manila, Cebu & Davao, the Mactan and Davao
international airports and ship terminals in the Visayas.
WIZ can also be accessed by customers and subscribers of Innove’s WorldPass, Globe through Wiz
On service, GlobeQUEST-owned Universal Access and DSL corporate customers, as well as
subscribers on international roaming service through the company’s partners, GoRemote, iPass, TSystems among others. This service is available both on prepaid and postpaid plans to cater to
customers’ various needs and budgets.
GlobeQUEST Private Networks offers a variety of dedicated communications services that allow
customers to run various data applications, access LANs or corporate intranets and extranets with
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The Business
integrated voice services on high speed, efficient and reliable connections. These include domestic
and international leased lines, frame relay, IPVPN, and remote access services. International data
services are offered in partnership with global network service providers.
GlobeQUEST DataCentres optimizes the security of mission-critical information and applications
through secure data centers operated and supported by a team of IT experts. GlobeQUEST has six
commercially available data centers, namely: MK1 (Valero Data Center), MK2 (Pasong Tamo), MD1
(Sheridan), MD2 (Pioneer), Cebu and Laguna DataCentres. These offer complementary services to
GlobeQUEST network services, ensuring that corporate customers are given end-to-end capabilities
and solutions.
GlobeQUEST Corporate Voice provides a full suite of telephony services, from basic direct lines to
ISDN services, 1-800 numbers, IDD and NDD access as well as managed voice solutions that enable
companies to access advanced telecommunications technology, such as managed IP
communications. With the advent of VOIP technology, GlobeQUEST is introducing new functionalities
on their Corporate Voice portfolio which will drive the voice business.
GlobeQUEST BroadBand Access is a network access solution that provides customers ultra-high
speed fiber optic network connectivity, over a fully redundant and diverse DWDM-based fiber
backbone. This service is designed for wholesale and corporate customers with huge bandwidth
requirements, mission-critical applications and rapidly growing needs, and who demand uninterrupted
access for their business operations. This service offering ranges from high speed leased lines to
Ethernet services and even Escon or fibre channel connections for disaster-recovery service
connectivity. Today, these services are heavily used by service providers, call centers and BPO
(Business Process Outsourcing) companies as well as banking and manufacturing institutions.
GlobeQUEST offers customers with superior dial-up services such as:
•
Dedicated Dial-up (DDU) – This service enables multiple users to connect to the internet using
only one phone line, as well as maintain a static IP address for better accessibility.
•
E-Business in a box – This provides start up companies with a complete set of solutions to
establish and maintain web presence for their businesses.
•
Wholesale and Corporate Remote Access Servers (RAS) – This provides companies the ability to
give its mobile/remote workers, as well as customers, access to the Local Area Network (LAN)
and Internet through a private and secure dial-up access without investing in and maintaining
costly network infrastructure.
KEY PERFORMANCE INDICATORS
Globe acknowledges the importance of its shareholders and is dedicated to optimize profitability and
efficiently manage the use of capital resources with a view to increasing shareholder value.
It constantly reviews and monitors its activities and key performance indicators to measure success in
implementing operating and financial strategies, plans and programs. Some of Globe’s key
performance indicators are set out below. Except for net income, these key performance indicators
are not measurements in accordance with Philippine Financial Reporting Standards (“PFRS”) and
should not be considered as an alternative to any measure of performance which are in accordance
with PFRS.
Gross Average Revenue Per Unit (Gross ARPU)
Gross ARPU measures the average monthly gross revenue generated for each subscriber. This is
computed by dividing recurring gross service revenues for a business segment for the period by the
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average number of the segment’s subscribers and then dividing the quotient by the number of months
in the period.
Net Average Revenue Per Unit (Net ARPU)
Net ARPU measures the average monthly net revenue generated for each subscriber. This is
computed by dividing recurring net service revenues of the segment for the period (net of discounts
and interconnection charges to external carriers and content provider revenue share) by the average
number of the segment’s subscribers and then dividing the quotient by the number of months in the
period.
Subscriber Acquisition Cost (SAC)
SAC is computed by totaling marketing costs (including commissions and handset/SIM subsidies or
the difference between non-service revenues and cost of sales) related to the acquisition programs
for the segment for the period divided by the gross incremental subscribers.
Average Monthly Churn Rate
The average monthly churn rate is computed by dividing total disconnections (net of reconnections)
for the segment by the average number of the segment’s subscribers, and then divided by the
number of months in the period. This is a measure of the average number of customers who
leave/switch/change to another type of service or to another service provider and is usually stated as
a percentage.
EBITDA
EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) is calculated as net service
1
revenues less subsidy , operating expenses and other income and expenses excluding any property
and equipment-related gains and losses and financing costs. This measure provides useful
information regarding a company’s ability to generate cash flows, incur and service debt, finance
capital expenditures and working capital changes. As the company’s method of calculating EBITDA
may differ from other companies, it may not be comparable to similarly titled measures presented by
other companies.
EBITDA Margin
EBITDA margin is calculated as EBITDA divided by total net service revenues. Total net service
revenue is equal to total net operating revenue less non-service revenue. This is useful in measuring
the extent to which subsidies, operating expenses (excluding property and equipment-related gains
and losses and financing costs) and other income and expenses, use up revenue.
EBIT
EBIT is defined as earnings before interest, property and equipment-related gains and losses and
income taxes. This measure is calculated by deducting depreciation and amortization from EBITDA.
Globe Group’s method of calculating EBIT may differ from other companies, hence, may not be
comparable to similar measures presented by other companies.
Net Income
As presented in the unaudited condensed consolidated financial statements for the periods ended 30
June 2007 and 2006, net income provides an indication of how well the company performed after all
costs of the business have been factored in.
66
The Business
FINANCIAL HIGHLIGHTS FOR JANUARY TO JUNE 2007
KEY DRIVERS
in P millions
Six Months Ended June 30
(Unaudited)
Profit & Loss Data
Net Operating Revenues
Service Revenues
1
Non-Service Revenues
Costs and Expenses
Cost of Sales
Operating Expenses
EBITDA
EBITDA Margin
Depreciation and Amortization
EBIT
Financing
Interest Income
Others - net
Provision for Income Tax
Net Income
2
Core Net Income
2007
2006
YoY % Change
33,009
31,621
1,388
12,067
1,995
10,072
20,942
66%
8,385
12,557
(3,267)
315
119
(3,299)
6,425
7,378
29,984
28,447
1,537
11,040
2,318
8,722
18,944
67%
8,001
10,943
(2,972)
435
(34)
(2,613)
5,759
6,144
10%
11%
-10%
9%
-14%
15%
11%
5%
15%
10%
-28%
-450%
26%
12%
20%
1
Non-service revenues are reported net of discounts on phonekits and SIM (Subscriber Identification Module) packs. The cost
related to the sale of handsets and SIM packs are shown under cost of sales. The difference between non-service revenues
and cost of sales is referred to as subsidy.
2
Core net income is NIAT before Forex/MTM gain (loss) and charges related to the early redemption of the Group’s 2012
Senior Notes recognized in the first quarter of 2007.
Globe posted net income after tax of P6.4 billion for the first half, 12% higher year-on-year on the
back of 11% growth in consolidated service revenues partly offset by increases in operating expenses
and provisions for income tax. Taking out the impact of the bond redemption costs and forex/MTM
gains or losses, core net earnings of P7.4 billion grew at a higher rate of 20% from last year’s P6.1
billion.
Consolidated EBITDA and EBIT for the year increased by 11% and 15% year-on-year, closing at
P20.9 billion and P12.6 billion, respectively. EBITDA margins stood at a healthy 66% of service
revenues, while EBIT margins were at 40%. Marketing and subsidy, as a percentage of net service
revenues remained at the 8% level due to calibrated spending on advertising, promotions and
acquisition efforts.
Wireless service revenues expanded by 12% year-on-year despite continued pressure on ARPUs.
Overall wireless revenue grew mainly driven by the sustained popularity of unlimited (“Short Message
Service”) SMS and bucket voice offers, as well as higher prepaid top-up levels with the introduction of
lower AMAX denominations. The continued strong revenue performance of the data segment is
largely attributable to the strong uptake of regular SMS and subscriptions to unlimited SMS offers. On
the other hand, wireline service revenues continued to register modest growth of 3%, despite the
adverse impact of the strong peso, boosted by higher broadband revenues following significant
improvements in total broadband subscriber base.
Total capital expenditures for the first half of 2007 amounted to P5.8 billion or 13% higher than last
year’s P5.2 billion as Globe deepened its geographic coverage to 95.3% and increased its population
reach to 98.5%. By the end of June 2007, 2G cell sites reached 6,046, a 10% increase from last
year’s 5,500 cell sites.
67
The Business
The company generated free cash flow of P11.6 billion, despite higher capex spending, during the
first half of 2007 compared to last year’s P12.7 billion.
Wireless Business
The wireless business accounted for 90% of the Globe Group’s net service revenues in the first half
nd
st
of 2007, growing by 12% to P28,313 million from P25,228 million in 2006. The 2 quarter and this 1
semester represents the wireless business’ strongest performance to date. Both voice and data
segments posted growth, increasing 2% and 27% year-on-year, respectively.
Wireless Voice
During the period, the wireless voice segment accounted for 54% of total wireless net service
revenues. Its year-on-year growth of 2% to P15,171 million was due to a larger subscriber base and
higher voice usage resulting from the strong uptake of bucket voice offers under Globe’s “Super Sulit
Offers” and TM’s Todo Tawag”. The Super Sulit Offers include the P10 for a 3-minute call and the 10
centavos kada Segundo (per-second call charging) for Globe-to-Globe call rates while the Todo
Tawag promotions consist of the “Todo Tawag 15/15” for 15 minute TM-to-TM calls at only P15 and
the 10 centavos kada Segundo TM-to-TM call rate.
For heavy IDD users, Globe continues to provide competitive IDD call rates to its Bridge Mobile
Alliance partners in Hong Kong, Malaysia, Singapore and Taiwan and other popular calling
destinations such as the US, Canada, Hawaii, Saudi Arabia and Japan under Globe’s Tipid IDD kadaSegundo and Super Sulit Tipid IDD promotions. Recently, Globe introduced P7.50 per minute call
rates to two additional Bridge Mobile Alliance partners, Optus (Australia) and SK Telecom (South
Korea). Various IDD initiatives have brought about year-on-year growth of 6% and 18% in total
outbound and inbound international traffic volumes, respectively.
To further drive revenues in the voice segment, Globe launched another innovative service which
enables Globe and TM subscribers to send voice messages. Under Globe Voice Message and TM
Boses Text services, subscribers can record a voice message with maximum duration of 30 seconds
for only 10 centavos per second and send this as a voice text message.
Wireless Data
Wireless data continue to register strong growth during the period mainly driven by higher
subscriptions of unlimited SMS offers and increased regular SMS usage from an expanded
subscriber base. As a result, data revenues’ share to total wireless revenues significantly increased
from 41% in 2006 to 46% for the first half of 2007.
Similar to the first quarter of 2007, Globe continues to gain good traction on its improved unlimited
text promotions which offer several variants of the intra-network unlimited SMS service. These
variants are customized to suit different subscriber profiles and budgets: UNLITXT ALL DAY(all day
unlimited texting at P20/day, P40/2days and P80/5days), UNLITXT DAYSHIFT (day shift unlimited
texting from 8 AM to 4:59 PM at P15/day and P30/2days), UNLITXT NIGHTSHIFT (night-shift
unlimited texting from 10 PM to 7:59 AM at P10/day and P20/2days), TXTPLUS (unlimited intranetwork texting plus reduced-rate of P0.75 per SMS to other networks at P25/day and P50/2days),
TXTPLUSCL (unlimited daytime texting plus free two 3-minute intra-network voice calls at P20/day),
SULITXT (100 Globe-to-Globe text for P15 and 75 TM-to-TM text for P10), and TM TXTAWAG
(unlimited off-peak texting plus free one 5-minute TM-to-TM voice calls at P15/day and P30/2days).
On the international SMS front, Globe’s current arrangement with Singtel enables Globe and TM
subscribers to send an international SMS message to Singtel subscribers for only P1, or equivalent to
the cost of a local text message. Also, the current IDD offer of five international SMS messages for
only P50 (compared to the regular rate of P15 per international SMS) has been extended due to good
uptake for these services.
68
The Business
To further boost revenues in the data segment, Globe introduced other innovative services such as
Micro Asenso! text facility (in partnership with Microfinance Program Committee) which enables
subscribers to access information, via SMS, on micro finance institutions in the Philippines via SMS
for only P2.50 per message. Globe has also recently partnered with Yahoo! to provide easy and
convenient access to various Yahoo! services, including Yahoo!’s informative OneSearch engine and
a suite of applications under Yahoo! Go 2.0. Globe subscribers can now download Yahoo! Go 2.0
free of charge from the myGlobe WAP site. In addition, Globe subscribers can now browse the
internet at the current promotional rate of only P0.075/kb (compared to the regular rate of P0.15/kb)
when they use the Yahoo! Go application.
Globe’s subscriber base continued to post significant gains during the first half, growing 30% year-onyear to reach 18.1 million subscribers. Gross and net subscriber additions continue to be strong
compared to last year. Total gross subscriber additions for the first half reached 6.9 million, up 30%
year-on-year, while second quarter additions of 3.7 million was 12% higher than last quarter’s 3.3
million. Meanwhile, net subscriber additions remain strong at 2.5 million on the back of lower year-onyear churn rates. First semester net additions are already at 76% of full year’s level.
Wireline Business
Globe and Innove have adopted a customer-centric approach to allow for the development of
products better suited to the specific needs and business requirements of its customers. Dedicated
business units have been created and organized within the company to focus on the wireless and
wireline needs of specific market segments and customers – be they residential subscribers,
wholesalers and other large corporate clients, or smaller scale industries. The Enterprise Business
Group (EBG) is one such business unit, created in response to corporate clients’ preferences for
integrated mobile and wireline communications solutions. Complete with its own dedicated technical
and customer relationship teams, EBG now offers a full suite of managed IP telephony services which
include the provision of IP PBX, inbound and outbound trunks, direct lines, international toll free
service and other ancillary equipment and applications.
Overall, the wireline business registered growth despite the continued appreciation of the peso on the
back of continued growth of the broadband segment. For the first half of 2007, the business posted a
3% gain in net service revenues from last year, reporting revenues of P3,308 million compared to last
year’s P3,219 million.
Wireline Voice
As of 30 June 2007, Innove increased its total wireline voice subscribers by 9% to 389,506 from
356,441 in 2006. The subscriber mix is 64% postpaid and 36% prepaid, with the business to
residential mix at 19:81 in the first half of 2007.
Our wireline voice service revenues increased by 4% from last year’s P2,172 million to P2,257 million
due to an expanded subscriber base. Gross and net ARPUs continued to decline on a year-on-year
basis, mainly resulting from lower voice maintenance revenues due to a shift in voice traffic to mobile,
subscriber conversions to bundled broadband packages that include free voice services and
decreased IDD revenues owing to the stronger peso.
Globe’s broadband business continues to show robust growth, with broadband subscriber base
expanding by 195% year-on-year and 29% quarter-on-quarter to reach 89,299 by the end of the
second quarter of 2007 as a result of aggressive acquisition promotions during the first half of the
year.
69
The Business
Wireline Data
Wireline data business registered service revenues of P1,051 million, in line with 2006 level as a
result of lower monthly recurring revenues from its international lease lines and corporate internet
services but offset by higher revenues from the domestic lease line segment on the back of an
expanded domestic circuit base. Additionally, the appreciation of the peso during the current year
accounted for lower revenues from foreign-currency linked subscriber billings.
Following the launch of GlobeQUEST ICON or IP-Converged Optical Network in 2006, Innove’s new
MPLS (Multi Protocol Label Switching) data network pioneered the first Virtual Private Line Service
(VPLS) in the Philippines. The VPLS allows the service to be extended to other countries through
Globe’s regional partnerships with Singapore Telecom and Hutchison Global Corporation and is now
available to serve Hong Kong, Singapore, Vietnam, Korea, Taiwan and the USA among other
destinations. VPLS is a multipoint transparent LAN service using familiar Ethernet interfaces to
connect multiple office locations. This allows the experience of being in one local area network and
differentiates Innove’s network by expanding its capabilities resulting in large network deals with
government agencies, BPO companies and multinational corporations.
Additionally, GlobeQUEST’s VPN Express offering has been expanded to include wireless access
methods such as GPRS and EDGE, in addition to the fixed line version utilizing DSL technology.
Enterprise customers with several branches, retail outlets or off-site operations or machines like
ATMs, can use this service to connect to their headquarters using a secure broadband connection in
a cost-effective way. This currently serves retail stores, banks and gas stations to name a few
enterprise applications. During the first semester of the year, Innove completed the full service
portfolio of its managed VPN Express service. The service uses both fixed DSL and wireless 2G/3G
with HSDPA technologies to provide broadband connections for banks and companies with sizeable
point-of-sale networks.
Other Globe Group Revenues
International Long Distance Services
On a consolidated basis, ILD revenues from the wireless and wireline services decreased by 1% to
P7,346 million during the first half of 2007 compared to last year’s P7,393 million due to lower
payment rates on inbound international calls coupled with the impact from the continued appreciation
of the peso. However, total ILD minutes continued to trend upwards driven by an 18% growth in
inbound minutes and a 6% improvement in outbound minutes on a year-on-year basis.
Both Globe and Innove offer ILD services which cover international calls between the Philippines and
over 200 countries. This service generates revenues from both inbound and outbound international
call traffic with pricing based on agreed international termination rates for inbound traffic revenues
and NTC-approved ILD rates for outbound traffic revenues.
As part of Globe’s commitment to serve overseas Filipino communities better and to address the
needs of specific segments such as the heavy IDD users among wireless subscribers, Globe
launched various IDD promos since the second half of 2005. Following its IDD CelebRATE! series of
offerings in 2005, Globe re-launched various promos in 2006 under the umbrella banner Globe Super
Sulit Offers. Globe continues to provide a discounted IDD rate of P7.50 per minute (equivalent to that
of a local rate) for calls to selected countries such as US and Canada (off-peak hours only), and other
Bridge Mobile Alliance partners such as Taiwan Mobile, HK CSL, Singtel, and Maxis Malaysia. During
the second quarter of 2007, Globe extended the P7.50 per minute discounted IDD rate for calls to
subscribers of Optus (Australia) and SK Telekom (Korea). Globe likewise maintained its competitive
IDD rates of US$0.30 per minute to countries with large OFW groups such as Japan and Saudi
Arabia.
70
The Business
To spur usage of its IDD services in the first quarter of the year, Globe offered a P24 rate for 3 minute
calls to the US and Canada anytime of the day for its subscribers. Globe also improved on its prepaid
G-ROAM service by lowering the roaming subscribers’ daily maintaining balance from P100 to P50.
The P24 for 3 minute call rate promotion ended last 18 May 2007 while the G-ROAM P50 daily
maintaining balance was extended to 15 October 2007.
Globe’s per second charging remains a unique offering to this date. It continues to offer the IDD per
second charging, at Philippine peso rates, to selected countries such as US, Canada, China,
Malaysia, Hong Kong, Singapore, Thailand, South Korea, Taiwan, Australia, United Kingdom, Kuwait
and Equatorial Guinea, as well as the per-second rate of US$.0067 to other countries.
Through its alliance with Bridge Mobile partners, Globe was also able to launch co-branded SIMs with
Singtel, Hong Kong CSL, Taiwan Mobile and Maxis Malaysia to provide OFWs the opportunity to
avail of discounted call and SMS rates when connecting with their families in the Philippines. Globe
also launched variations of its Kababayan phone cards that offer discounted IDD call rates to OFWs
in Japan and Hong Kong.
On the wireline front, Globelines continues to offer its Lowest IDD rates promotion via its Globe1 card.
Globe1 card users continue to enjoy P2.50 per minute (USA, Canada, Australia, Hong Kong and
Singapore), P4.50 per minute (China, Malaysia, Taiwan, South Korea and Thailand) and US$0.40 to
other destinations from Globelines postpaid, prepaid lines and payphones nationwide.
To ensure that the company fully benefits from the increased ILD volume, it continues to actively
monitor International Simple Resale (ISR) operations passing through its networks. An ISR operation,
a bypass and block service considered illegal in the Philippines, is a method of terminating inbound
international calls without passing through the International Gateway Facility. If ISR operations are
unchecked, Globe will not be able to realize the full inbound international revenue and instead earn
only normal domestic termination charges for local or NDD calls or access charges from other
carriers, which are lower than international termination rates.
To reduce ISR activities, Globe initiated increased detection and blocking procedures including closer
coordination of detected ISR lines with other industry players. The Company also implemented
arrangements with international carriers to reduce arbitrage opportunities for ISR operators. The
Company further tightened its fraud and risk evaluation process for corporate and individual accounts
and is implementing legal, commercial and technical solutions to the ISR concern, such as the
immediate termination of SIMs detected as being used for ISR operations and the suspension of
AutoLoad Max retailers identified as having significant loading transactions to ISR SIMs. The
Company also regularly coordinates with the NTC and other government agencies in addressing this
concern.
Interconnection
Domestically, the Globe group pays interconnection charges to other carriers for calls originating from
its network terminating to other carriers’ networks, and hauling charges for calls that pass through
Globe’s network terminating in another network.
Internationally, the Globe group also incurs payouts for outbound international calls which are based
on a negotiated price per minute.
The interconnection expenses paid as a percentage of gross service revenues for the period
registered at 14% for the first half of 2007 from 19% for the same period in 2006.
The Globe group also collects termination fees from local carriers whose calls terminate in Globe
Group’s network. Domestic calls terminating to wireless networks are charged a termination rate of
P4.00 per minute while calls terminating to wireline voice networks are charged a termination rate of
P3.00 per minute.
71
The Business
DIVIDEND POLICY
Dividends declared by Globe on its shares of stocks are payable in cash or in additional shares of
stock. The payment of dividends in the future will depend upon Globe’s earnings, cash flow and
financial condition, as well as other factors. Cash dividends are subject to approval by Globe's Board
of Directors but no stockholder approval is required. Property dividends which may come in the form
of additional shares of stock are subject to approval by both Globe's Board of Directors and
stockholders. The following are the cash dividends declared and paid by the company over the past
two years.
Cash Dividends Declared – 2005 to 2007
Amount (P)
Record Date
Payment Date
20.00
20.00
20.00
February 18, 2005
August 19, 2005
February 21, 2006
March 15, 2005
September 14, 2005
March 15, 2006
30.00
August 17, 2006
September 12, 2006
33.00
February 19, 2007
March 15, 2007
33.00
August 29, 2007
September 14, 2007
RISK MANAGEMENT
To mitigate foreign exchange risk, the Globe group enters into short-term foreign currency forwards
and long-term foreign currency swap contracts. Short-term forward contracts are used to manage
foreign exchange exposure related to foreign currency-denominated monetary assets and liabilities.
For certain long-term foreign currency denominated loans, Globe enters into long term foreign
currency and interest rate swap contracts to manage foreign exchange and interest rate exposures.
As of 30 June 2007, the company had US$47 million in notional amount of outstanding foreign
currency swap agreements and US$160 million in short-term forward contracts, some of which have
option features.
Interest rate swaps are used to manage interest rate risk in a cost-efficient manner. As of 30 June
2007, the company had US$43 million in notional amount of US$ swaps under which it effectively
swapped some of its floating US$ denominated loans into fixed rate, with semi-annual payment
intervals up to January 2011. The company also has US$5 million in notional amount of US$ swaps
under which the company receives a fixed rate of 9.75% and pays a floating rate based on LIBOR,
subject to a cap. The performance of the swap is linked to the 10-year and 30-year US$ Constant
Maturity Swap Rates. The company also has a fixed to floating interest rate swap contract with a
notional amount of P1 billion, in which it effectively swapped a fixed rate Philippine peso denominated
bond into floating rate with quarterly payment intervals up to February 2009 and float to fixed interest
rate swap contracts with a notional amount of P1 billion which converts the floating rate back to fixed
rate.
The Globe group also has embedded forwards and options in certain financial and non-financial
contracts with total notional amount of US$26 million.
Gains (losses) on derivative instruments represent the net mark-to-market (MTM) gains (losses) on
derivative instruments. As of 30 June 2007, the MTM value of outstanding derivatives of the Globe
group amounted to (US$12.8 million) while losses on derivative instruments arising from changes in
MTM reflected in the consolidated income statements amounted to P743 million, which includes the
losses on the bond option value prior to the bond call date amounting to P454 million.
On the other hand, the Globe group also has foreign currency-linked revenues (which includes billed
in foreign currency and settled in foreign currency, and billed in pesos at rates linked to a foreign
72
The Business
currency tariff and settled in pesos) and expenses which serve as natural hedges against foreign
exchange exposure. Consolidated foreign currency-linked revenues were at 25% and 30% of total net
revenues for the periods ended 30 June 2007 and 2006, respectively. For the first half of 2007,
foreign currency-linked revenues comprised 24% of net wireless revenues and 34% of net wireline
revenues. In contrast, foreign-currency linked expenses were at 13% and 10% (as a percentage of
total operating expenses) for the periods ended 30 June 2007 and 2006, respectively.
RECENT DEVELOPMENTS
On 6 August 2007, Globe and Innove unveiled its new brand identity to reinforce its commitment to
serve its customers better, strengthen consumer recall and serve as a unifying symbol for the Globe
Group’s products and services. The new Globe brand is symbolized by the “Globe Life” logo and an
encompassing commitment to offer ease and relevance to customers. The logo illustrates the wealth
of products and services offered by the Globe group which surround a hand, symbolizing the
company’s customers, to whom it is focused on providing customer satisfaction.
73
The Business
IV.
AC CAPITAL
Ayala holds a portfolio of other investments – which include operations in water distribution,
electronics and information technology, automotive dealership and international businesses – under
an internal development division called AC Capital.
WATER DISTRIBUTION
MANILA WATER COMPANY, INC.
Ayala engages in water distribution and the provision of sewerage services in the East Zone of Metro
Manila through Manila Water, a company in which Ayala owns 30.2% as of June 30, 2007. The other
major shareholders of Manila Water are United Utilities B.V. ("United Utilities") (11.7%), Mitsubishi
(7.8%), International Finance Corporation (“IFC”) (7.3%), and BPI Capital (3.3%). The rest of Manila
Water’s shares are owned by the public and the Manila Water employees through an employee stock
ownership program.
In February 1997, Manila Water was awarded a 25-year concession from the Metropolitan
Waterworks and Sewerage System ("MWSS") to provide water and sewerage services to the East
Zone (described below) of Metro Manila. On August 1, 1997 (the "Commencement Date"), Manila
Water assumed MWSS' operations in the East Zone.
Pursuant to a shareholders' agreement and service agreements with Manila Water, Manila Water's
main shareholders have taken on active roles in certain aspects of the operations of MWC. Ayala has
undertaken to provide Manila Water with management services with respect to business, regulatory
affairs, administrative, financial, human resources and capital works, including project management
and procurement and assistance in regulatory affairs. United Utilities, a water utility operator in the
United Kingdom, has agreed to provide technical support, including secondment of personnel, in
connection with the operation and maintenance of the system. Each of these shareholders
participates in the management of Manila Water through representation in the board of directors.
Manila Water's strategy is to improve the overall operational efficiency of its business, which thus
results in an increase in its profitability. To facilitate this, Manila Water has divided its service area
into separately managed territories, each with the goal of improving customer service, increasing the
volume of billed water, controlling and reducing non-revenue water and increasing the size and
quality of its customer base.
On March 18, 2005, Manila Water successfully completed an IPO of 550 million of its common shares
and listed them in the PSE. The net proceeds to Manila Water of its IPO were P3.4 billion. Some of
Manila Water’s shareholders, including Ayala, also completed a simultaneous secondary offering of
some of their Manila Water common shares. As of September 30, 2007, Manila Water had a market
capitalization of P28.2 billion.
CONCESSION AREA - EAST ZONE
MWSS divided Metro Manila and certain surrounding areas into the East and West Zones. The East
Zone, serviced by Manila Water, is composed of 23 cities and municipalities in Metro Manila and the
Province of Rizal. With an estimated number of residents at approximately 5.3 million, the East Zone
accounted for about 40% of the total population of the MWSS area as of December 2006.
74
The Business
Concession Agreement
Under the terms of the agreement with MWSS to manage and operate the East Zone service area
(the "Concession Agreement"), Manila Water has the right to bill and collect for water and sewerage
services supplied in the East Zone. In return, Manila Water is responsible for the management,
operation, repair and refurbishment of the MWSS facilities in its service area, in accordance with
specific operating and performance targets and the payment of stipulated MWSS concession fees.
The Concession Agreement provides for MWSS to retain ownership of the existing physical assets,
while Manila Water has the right to manage, operate, repair and refurbish and to certain extent,
decommission such assets. Manila Water will have title to all new fixed assets it adds to the MWSS
system during the concession until the concession expires, at which point, title and interest to such
additional assets revert to MWSS.
The Concession Agreement required an initial capitalization of P1.0 billion and an additional P1.0
billion at the end of the first year of the concession. These capital contributions were made by Manila
Water's shareholders in proportion to their interests. Manila Water is required to post an annually
renewable performance bond in favor of MWSS to secure Manila Water's performance of its service
obligations. The bond value is initially US$70.0 million, declining to US$60.0 million in 2008, and
US$50.0 million from 2018 to 2022.
Operations and Performance
Under the Concession Agreement, Manila Water is required to extend the existing water supply and
sewerage systems in order to meet coverage targets, which are set out as percentages of the
population in the service area receiving water supply and the percentage of the connected
population receiving sewerage services. Manila Water is also required to provide sewerage and
sanitation services.
Manila Water must also comply with regulatory standards for its supplied water and wastewater.
Since the Commencement Date, Manila Water has improved its rate of compliance with water quality
standards. Manila Water has also achieved significant reductions in non-revenue water (“NRW”) by
service pipe replacements and reducing illegal connection.
Tariff Structure and Rate Regulation
Different water tariff schedules apply to different categories of customers. In addition to water tariffs,
customers pay an environmental charge equal to 10% of their water bill and a flat meter
maintenance service charge. Customers who receive sewerage services also pay a sewerage
charge equal to 50% of their water bill. Manila Water also charges a currency exchange rate
adjustment, which is fixed at P1.00 per cubic meter.
Revisions to the structure and levels of tariffs are governed by the Concession Agreement. The basic
tariffs are adjusted annually to account for inflation (as measured by the Philippine Consumer Price
Index [“CPI”]) and to account for certain events beyond the control of Manila Water (extraordinary
price adjustments to cover such factors as foreign currency losses). Every five years, a “raterebasing” exercise is conducted with the regulators to ensure that Manila Water earns a target rate of
return on its capital equal to the appropriate discount rate over the 25-year term of the concession.
Tariff adjustments are subject to the approval of the MWSS Regulatory Office.
In November 2001 MWSS approved an amendment to the Concession Agreement which now allow
both concessionaires to recover through tariff adjustments their past foreign exchange losses and at
the same time adopt a foreign currency differential adjustment (“FCDA”) for foreign exchange losses
or gains incurred in 2002 and onwards. The FCDA is evaluated quarterly, the latest of which was
75
The Business
implemented on July 1, 2007. In January 2003, the first of the tariff rate rebasing, which are
scheduled every five years, was completed. Manila Water was granted a weighted all-in tariff rate of
P17.00 per cubic meter, which was implemented in two stages in 2003 and 2005.
Concession Fee
Manila Water must pay an annual concession fee to MWSS, covering certain debt service costs and
at the same time provide local support funding for MWSS projects on-going as of turnover date. It
was also mandated to share in the operating costs of MWSS's Administrative and Regulatory Offices
through the annual regulatory fee set initially at P100.00 million and adjusted annually by CPI. The
amount of the concession fee paid from 1997 to 2006 totaled P4.1 billion. In addition, Manila Water
had to pay a commencement fee of US$5.0 million at the Commencement Date.
The company ended the first semester with water sales reaching a record 1,054 million liters per day
(“mld”), 13% or 121 mld higher than June 2006. Initiatives to address commercial losses, coupled
with efficient network management, came into fruition as non-revenue water improved to 25.4%, a
4%-pt reduction versus June 2006.
January to June 2007 operating revenues was at P3.5 billion, up by 18% year-on-year. The revenue
increase versus last year was brought about by the combined effect of tariff adjustments (CPI) and
13% growth in water sales. EBITDA of P2.3 billion further grew, with margins at 61%, 27% higher
than last year’s P1.8 billion. Net income amounted to P1.1 billion, 9% lower than P1.2 billion posted in
the same period last year after providing P485 million for income tax payments because of the
expiration of its income tax holiday in 2006.
Total assets remained solid at P23.2 billion, down 4% from December 2006 level as a result of the
decrease in cash reserves. This decrease was as result of prepayment of loans from the cash which
was originally intended for the bid for the West Zone. Accounting for the growth in property, plant
and equipment are P1.4 billion worth of transmission and distribution lines and leasehold
improvements.
The company’s current and debt-equity ratios registered at 1:1 and 43:57 respectively.
The company’s top five Key Performance Indicators are discussed below:
Billed Volume and Collection
Billed volume as of end-June registered at 1,054 mld, better than the same period last year by 121
mld. Billed volume growth was driven by improved network efficiency and the completion of various
pipelaying projects at the expansion areas. Collection efficiency averaged 99%, still above regulatory
target by 4%.
Total Connections
Total connections refer to the number of household connections and the number of water service
connections. For the first semester, the company posted around 953,000 households. This brings the
total number of water service connections to 625,000, an increase of 43,000 connections from
December 2006 level.
Non-Revenue Water
Non-revenue water is measured by liters per connection per day and as a percentage of water
production volume. Supply management and other NRW-reduction initiatives such as network
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The Business
simplification, Tubig Para Sa Barangay Projects, comprehensive leak repairs, and intensified pipe
and meter replacement projects continued to pay off as NRW further dropped to 25.4% as of endJune, 4% points better than June 2006.
WATER QUALITY IN DISTRIBUTION
Water quality in distribution is measured by the percentage of its compliance with the Philippine
National Standard for Drinking Water limits on total coliforms. Water quality compliance on total
coliforms was maintained from the previous years’ level at 100% as against the 95% target set by the
Department of Health. The company continues to conduct weekly residual chlorine tests, monthly
bacteriological examinations and frequent regular inspection of water and sanitation facilities to
ensure that these East Zone residents have continuous access to clean water.
SANITATION
Sanitation is measured by the number of septic tanks emptied. As part of the scheduled desludging
program, 162,000 households were served by septic tank emptying to date.
DIVIDEND POLICY
Under Manila Water’s cash dividend policy, common shares shall be entitled to annual cash
dividends equivalent to 30% of the prior year’s net income, payable semi-annually in March and
September. The company’s Board of Directors may change the cash dividend policy at any time.
MWC’s Board of Directors is authorized to declare cash dividends. A cash dividend declaration does
not require any further approval from the stockholders. A stock dividend declaration requires the
further approval of stockholders representing not less than two-thirds of Manila Water’s outstanding
capital stock.
RESEARCH AND DEVELOPMENT ACTIVITIES
Manila Water’s various projects required a capital expenditure outlay of P4.8 billion in 2006 and were
mainly geared towards pipe-laying to increase the company’s coverage area and pipe replacements
to reduce system losses and improve water availability.
With focus on growing and continuously providing quality service to the East Zone, Manila Water
plans to invest at least P30 billion in the next five years for further network extension and
improvements, expand wastewater coverage and develop new water sources.
ELECTRONICS AND INFORMATION TECHNOLOGY
Ayala is involved in electronics and information technology through IMI, and Azalea Technology. As
of June 30, 2007, IMI’s major shareholders were Ayala (70.34%), and Resins Inc. (17.59%). Azalea,
which is wholly owned by Ayala, was established in January 2000 to be a holding company for
Ayala’s technology related investments.
INTEGRATED MICROELECTRONICS, INC.
IMI is an electronics manufacturing services (“EMS”) provider to some of the world’s largest Original
Equipment Manufacturers (“OEMs”). IMI serves customers mainly in the industrial, storage,
automotive, telecom and consumer electronics end-markets with potential for medical. IMI’s service
offerings include design services, product development, prototyping, component assembly, hard and
optical disk drive sub-assembly, printed circuit board (PCB) assembly, plastic injection, metal
77
The Business
stamping, box-build, supply chain management, and after-sales service. For the six months ended
June 30, 2006, 48% of its production was exported to Japan while the U.S.A. and Europe accounted
for 23% and 17%, respectively. IMI's main strategy going forward is to develop more value-added
capabilities to enable it to provide a complete EMS solution to its clients.
IMI has a 100% stake in Eazix Inc., which is engaged in electronic product and component design.
On January 29, 2005, IMI entered into an Asset Purchase Agreement with Saturn Electronics and
Engineering, Inc. (“Tustin”) and Saturn Electronics Philippines, Inc. (“Saturn”) for the purchase of
certain assets and contracts, and the assumption of certain liabilities of Tustin and Saturn. Included
in the assets purchased are the design team, patents and leased facility in Tustin, California;
manufacturing team and facility in Cebu; and, client support and procurement team in Singapore.
On December 6, 2005, IMI acquired Speedy-Tech Electronics Ltd (“Speedy-Tech”), a Singaporebased EMS and power electronics company with facilities in Singapore, China and the Philippines.
Speedy-Tech became a wholly owned subsidiary of IMI and its shares were delisted from the
Singapore Stock Exchange.
IMI also acquired Michael Hansson Consulting Inc., a Philippine-based engineering-oriented systems
integrator, in the third quarter of 2006. This allows IMI to provide high-end test, measurement and
control solutions to local electronics and semiconductor companies.
IMI posted US$199 million in sales revenues and US$13 million in net income after tax for the first
semester of 2007.
PRODUCTS AND MANUFACTURING
IMI's principal products are PCBAs and electronic sub-assemblies for a variety of storage,
communications, consumer, automotive and industrial electronic applications, contracted either on a
dedicated (consignment) or merchant (full-turnkey) basis. Its main customers include Panasonic,
IIDA, Epson, Philips, Hitachi, Isahaya and Toshiba, among others.
IMI's consignment contracts, which comprise approximately 39% of IMI’s total revenues (for the six
months ended June 30, 2007), are manufactured on captive assembly line arrangement. These lines
are dedicated to a specific customer with facilities designed and operated in close co-ordination with
the customer. Raw materials, equipment and the required technology are supplied by the customer
while IMI provides the facilities, manpower and production management expertise corresponding to
the requirements of each customer. The balance of IMI’s turnover was produced on a turnkey basis.
In providing total turnkey solutions for its customers, IMI works closely with them in the design stage,
leverages its own material sourcing and logistics capabilities and then manufactures and packages
the products using IMI's own equipment and technology.
Speedy-Tech has a well-diversified base of customers spread over a wide spectrum of industries
such as the IT, industrial equipment, medical devices, telecommunications and consumer electronics
sectors covering the U.S.A., Europe and the Asia-Pacific region. Speedy-Tech counts amongst its
customers established global electronics players such as Canon, Dentsply, EBM-Papst, Emerson
Network Power, Fiberxon, Guest, Hewlett Packard, Huawei Technologies, LG Electronics, NEC,
Nippon Antenna, Printronix, Shimadzu and Videojet Technologies.
The IMI group has maintained a commitment to providing quality products and services. IMI
continued to maintain its 9001:2000 Quality Management Systems certification. IMI also achieved
another quality milestone when it received the ISO/TS 16949 certification, an international quality
system standard for automotive industries. Moreover, IMI has embraced the Six Sigma management
philosophy, a management tool that encompasses a broad array of best practices and knowledge on
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The Business
how to improve processes in order to achieve operational excellent results and financial gains to the
company. IMI continues its transformation programs that include the Six Sigma business process
innovation program. In addition, IMI’s quality circles continue to win top honors in the Quality and
Productivity Improvement Circle (QPIC) Regional and National Competitions.
Similarly, Speedy-Tech has a strong commitment to quality. Its quality assurance system is regularly
audited by its customers and certification authorities for ISO, QS and BABT.
IMI companies including Speedy-Tech have received numerous awards from its customers in
recognition of its relentless pursuit for performance excellence
FACILITIES
IMI has a total of 75,015 square meters of manufacturing space located in the Laguna Technopark, in
the Laguna International Industrial Park and in Mactan Export Processing Zone, Cebu. Within these
spaces, IMI runs surface-mount technology (“SMT”) lines for the assembly of PCBAs as well as a
variety of back-end testing equipment. Through its investment in Eazix Inc., IMI maintains dedicated
design facilities in Alabang. Due to its acquisition of Satrun, another design facility is located in Tustin,
California. Speedy-Tech has six production facilities: one in Singapore, one in the Philippines and
four in China. The total manufacturing space of the six is 64,400 square meters.
COMPETITION RISK
IMI operates in a highly competitive global environment dominated by several very large participants
(with sales in excess of U.S.$1.0 billion). Foreign EMS providers that offer lower manufacturing cost
pose as risk to IMI’s competitive position since its customers could shift to them. In response to this
risk, IMI leverages its global manufacturing as well as designs footprints. Also, IMI maintains the high
quality of its products in order to give the best price-value proposition to its customer. The group
believes that by continuously improving its value-added services, asset efficiency, and the quality of
its manufacturing processes, and combining this with a productive labor force, IMI can successfully
compete on its chosen target segments.
RESEARCH AND DEVELOPMENT ACTIVITIES
IMI’s research and development activities are carried out in EAZIX and in Speedy-Tech. IMI designs
and develops complete products and subsystems to assist original equipment manufacturers in
product realization. IMI’s design and development capabilities encompass short-range wireless
technologies, embedded systems, and power electronics. It engineers work in close coordination
with customers during the early stages of product development to ensure a seamless transition from
design conceptualization to volume manufacturing. In addition, IMI USA (acquired from Tustin) is
home to IMI’s advanced manufacturing technology R&D activities, with focus on areas including flip
chip, substrate and interconnect technologies.
ENVIRONMENTAL COMPLIANCE
IMI complies with ISO 14001, international standard for Environment Management Systems as
certified by SGS since year 2000. Moreover, IMI has converted some of its SMT lines to RoHS
(Restriction on Hazardous Substances) compliant lines. This environmental compliance enables IMI
to qualify as a contract manufacturer for various OEMs.
AUTOMOTIVE
Ayala engages in the automotive business through its minority investments in assembly companies
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The Business
and through its network of Honda and Isuzu dealerships.
AYALA AUTOMOTIVE HOLDINGS CORPORATION
Ayala, through Ayala Automotive Holdings Corp. (“AAHC”), has eight Honda dealerships and five
Isuzu dealerships nationwide.
For the first six months of 2007, total industry sales reached 54,256 units, posting a 17% growth from
previous year. The improvement in sales resulted from the launch of new models, aggressive
financing promos, and intensive advertising campaigns. Commercial vehicles, with 24% growth from
2006, comprised 65% of the market. On the other hand, passenger cars, with a 6% improvement
from 2006, accounted for 35% of the market. AAHC sold a total of 5,817 units for the first half of
2007 which accounted for 11% of the total industry sales. Given this year’s performance, AAHC
realized net income of P166 million from dealership operations, which was 24% above the prior
year’s P134 million income.
Through its strong dealership network, AAHC will continue to pursue quality leadership and service
excellence, affirming its commitment to total customer satisfaction.
Research and Development Activities
Amounts spent by AAHC on development costs for its dealership operation are not material.
Environmental Compliance
Amounts spent by AAHC on compliance with environmental laws are not material.
Customer Satisfaction Risk
The operations of AAHC’s subsidiaries create risk of customers being dissatisfied with faulty or nonperforming products or services. If not properly managed, this can adversely affect the company’s
reputation which may result in decline in revenues and loss of market share. In response to this risk,
AAHC has launched and enhanced several customer-focused programs that promote quality and
service excellence. Regular and constant customer surveys/studies are conducted in assessing the
effectiveness of these projects and identifying customer concerns and rising customer expectations.
AAHC remains committed to its pursuit of total customer satisfaction to ensure its long-term growth.
HONDA CARS PHILIPPINES INC.
Honda Cars Philippines, Inc. (“Honda Cars”) is a joint venture between Ayala (12.9%), Honda Motors
Co., Ltd. (74.2%) and RCBC (12.9%). Honda Cars assembles and manufactures Honda automobiles
for the Philippine market in Laguna Technopark.
Sales of Honda Cars were at 8,179 units as of June 2007. The new Civic accounted for 46% of
Honda Cars sales. Honda Cars continued to rank second among passenger car manufacturers and
captured 34% of the market. Ayala’s Honda dealership network increased its overall leadership
position from 51% to 54% share of total Honda sales. Its flagship dealer, Honda Cars Makati
continues to be the best-selling dealer nationwide.
For the period ended June 30, 2007, Honda Cars’ net income was P167.4 million.
ISUZU PHILIPPINES CORPORATION
Ayala has a 15% share in Isuzu Philippines Corporation (“Isuzu Philippines”), a joint venture with
80
The Business
Isuzu Motors Ltd. (35%), Mitsubishi (35%) and RCBC (15%) to produce Asian Utility Vehicles
(“AUV”), pick-up trucks, small and medium-sized trucks and buses. Isuzu Philippines commenced
production of commercial vehicles in June 1996. Isuzu Philippines’ sales of 4,489 commercial
vehicle units represented a 13% growth in unit sales for the first six months of 2007. This allowed
Isuzu to maintain its number 3 rank in the commercial vehicle segment with a 13% market share.
For the period ended June 30, 2007, Isuzu Philippines’ net income was P167.6 million.
The Isuzu Philippines dealerships of Ayala collectively accounted for 31% of total Isuzu Philippines’
sales, leading all other Isuzu Philippines dealers.
BUSINESS PROCESS OUTSOURCING
LiveIt Solutions Inc. (“LiveIt”) was incorporated in June 2006 as Ayala’s holding company for its
investments in the BPO sector. Another BPO company, HRMall Inc., was also incorporated in June
30, 2006.
LIVEIT SOLUTIONS, INC.
LiveIt’s objective is to create a portfolio of high-growth and differentiated BPO companies, through
acquisition or investment in existing US, Philippine or India BPO companies. Target companies are
those that provide complex services, have well-established customer relationships in global markets,
and have the potential for add-on acquisitions.
As of June 2007, LiveIt has made cumulative investments of over P4.6 billion, or approximately
US$91.3 million in three companies: eTelecare Global Solutions Inc. (“eTelecare”), Integreon
Managed Solutions Inc. (“Integreon”), and Affinity Express Inc. (“AE”).
eTelecare focuses on providing complex voice-based services such as technical support, financial
advisory, warranty support, customer retention and marketing surveys and research for the US
market. Integreon is a Los Angeles-headquartered company that is a leading provider of high-value
and complex BPO solutions in the areas of knowledge, document content and graphics, business
administration and discovery support services. LiveIt’s invested an additional US$11 million in
Integreon to fund the acquisition of CBF Group, a US-based company that exclusively provides
enterprise services to law firms. AE is a Chicago-based company, which is a leading provider of
graphics and design services. The Philippine subsidiaries of Integreon and AE were incorporated in
March 2007 and April 2007, respectively. Integreon’s PEZA accreditation application was approved
in July 2007 while AE is still in the process of obtaining the PEZA accreditation.
HR MALL, INC.
HRMall is a human resource BPO wholly owned by Ayala. It started operations in July 2006 initially
servicing the payroll and timekeeping requirements of Globe Telecom and its subsidiaries at all levels
of the organization. This is the company’s first step in being the primary shared services center for
human resources across the Ayala group. HRMall will be delivering its services using a new platform
to Globe and Ayala Land within 2007.
INTERNATIONAL
Ayala's international operations are conducted primarily through its wholly owned subsidiary, AIPL.
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The Business
AYALA INTERNATIONAL PTE LTD
AIPL’s initiatives in the last two years are to nurture and expand existing partnerships and to seek
new ones continue to gather momentum resulting in a deal pipeline that is yielding new investment
opportunities in different property sectors in both Asia and the United States.
AIPL’s net income for first half 2007 was US$76.9 million, nearly thrice that of the same period of the
previous year due to the US$7 million gain on sale of its 23.3% stake in Hermill, the company that
owns the Forum office and retail building along Orchard Road in Singapore.
AIPL’s joint venture with the Narai group of Thailand, Nayara, has fully sold and completed the
construction of its first residential condominium project in Bangkok in 2006. In a move to expand the
partnership, Nayara has acquired two properties in Bangkok for residential condominium
development.
AIPL’s U.S. business started completing the investment cycle on earlier investments with the sale of
three joint venture projects since 2005. AIPL continued its diversification into rental properties with
the acquisition, together with a partner, of student-targeted apartments and properties for
development into shopping centers. AIPL currently has apartment leasing inventory of over 1,200
units. These present value-add opportunities in a firming apartment market. AIPL’s total investment in
these apartment projects amounted to US$4.4 million. In 2006, 3 projects in the US were launched:
single family homes in Nevada, active senior family homes in Utah and residential condominium
project in Kansas.
AIPL will continue to focus in US, Hong Kong and Thailand property markets not only as a direct
property investor but also as a conduit for investors in a principal-sponsored club investment and/or
fund management mode. In August 2006, AIPL committed to sponsor and invest US$50 million in
ARCH Asia Property Fund, a private equity fund which will focus on real estate investments in the
Asian region, particularly in China, India, and Thailand. AIPL also invested in ARCH Capital
Management, the fund management company that will actively pursue investments for said private
equity fund.
The market value of AIPL’s current portfolio as of June 30, 2007 is about US$110 million with assets
focused mainly in China (51%), the US (29%), Thailand (8%), and the rest of Asia (i.e. Indonesia,
Malaysia - 5%). Out of the current portfolio of US$ 110 million, 50% are in direct investments, while
the other half is through fund investments.
AIPL intends to continue to expand and diversify from residential development into other property
segments, specifically shopping centers, apartments, and mixed-use properties.
82
EMPLOYEES AND LABOR RELATIONS
As of December 31, 2006, Ayala had 116 employees. All regular non-managerial employees are
covered by a new Collective Bargaining Agreement which took effect on January 1, 2007 with a term
that lasts until December 31, 2009. Ayala has not experienced any strikes by its employees and there
is no known threat of a strike.
For the near term, Ayala intends to maintain its current headcount. Of Ayala’s 116 employees, 72 are
managers, and 44 make up the support staff. Ayala does not have supplemental benefits or incentive
arrangements with its employees.
83
LEGAL PROCEEDINGS
Except as disclosed herein, there are no material pending legal proceedings to which Ayala is a party
or of which any of its material properties are subject.
AYALA LAND, INC.
Ayala Land is not involved in any litigation it considers material. However, certain individuals and
entities have claimed an interest in Ayala Land's properties located in Las Piñas, Metro Manila, which
are adjacent to its development in Ayala Southvale. The controversy involves approximately 130
hectares (remaining area) owned by Ayala Land in Las Piñas.
Prior to purchasing the aforesaid properties, Ayala Land conducted an investigation of the titles to the
properties and had no notice of any title or claim that was superior to the titles purchased by Ayala
Land. Ayala Land traced its titles to their original certificates of title and Ayala Land believes that it
has established its superior ownership position over said parcels of land. Ayala Land has assessed
these adverse claims and believes that its titles are in general superior to the purported titles or other
evidence of alleged ownership of these claimants. On this basis, beginning in October 1993, Ayala
Land filed petitions in local regional trial courts of Makati and Las Piñas for quieting of title to nullify
the purported titles or claims of these adverse claimants. A number of these cases are at various
stages of trial and appeal. Some of these cases have been finally decided by the Supreme Court in
Ayala Land's favor. These include decisions affirming the title of Ayala Land to approximately 21
hectares of these properties, which have been developed and offered for sale to the public as
Sonera, Ayala Southvale.
Ayala Land does not intend to develop and sell the rest of the Las Piñas properties until litigation is
resolved. Ayala Land has made no provision in respect of such actual or threatened litigations.
GLOBE TELECOM, INC.
Globe Telecom and Innove are contingently liable for various claims arising in the ordinary conduct of
business and certain tax assessments which are either pending decision by the courts or are being
contested, the outcome of which are not presently determinable. In the opinion of management and
legal counsel, the eventual liability under these claims, if any, will not have a material or adverse
effect on the Globe Group’s financial position and results of operations.
Globe is an intervenor in and Innove is a party to a civil case by virtue of which Globe and Innove,
together with other cellular operators, sought and obtained a preliminary injunction against the
implementation of NTC Memorandum Circular No. 13-6-2000 from the RTC of Quezon City. NTC MC
13-6-2000 prescribed new billing requirements for cellular service providers. The NTC appealed the
issuance of the injunction to the Court of Appeals (“CA”). On 25 October 2001, the CA ordered the
dismissal of the case before the RTC for lack of jurisdiction, but without prejudice to the wireless
companies’ seeking relief before the NTC, which the CA claims had jurisdiction over the matter. On
22 February 2002, a Petition for Review was filed with the Supreme Court (“SC”) to annul and reverse
the decision of the CA. The SC, on 2 September 2003, overturned the CA’s earlier dismissal of the
petitions filed by SMART and Globe. In its 13-page decision, the SC said that the Quezon City trial
court could hear and decide the case, contrary to NTC’s argument. The SC has also since denied the
NTC’s motion for reconsideration. Globe is currently awaiting resumption of the proceedings before
the RTC of Quezon City.
On May 22, 2006, Innove received a copy of the Complaint of Subic Telecom Company (“Subictel”),
Inc., a subsidiary of PLDT, seeking an injunction to stop the Subic Bay Metropolitan Authority and
Innove from taking any actions to implement the Certificate of Public Convenience and Necessity
granted by SBMA to Innove. Subictel claimed that the grant of a CPCN allowing Innove to offer
84
Legal Proceedings
certain telecommunications services within the Subic Bay Freeport Zone would violate the Joint
Venture Agreement (“JVA”) between PLDT and SBMA. Innove has since filed its Opposition to the
Prayer for Injunction with Motion to Dismiss, citing that SBMA is not entitled to an injunction on the
basis of the grounds it has cited in the complaint, that an injunction in this case would be contrary to
public policy, and that the complaint is forum-shopping since Subictel had already previously objected
to the grant of the CPCN in the proceedings before the regulatory body. SBMA also filed its
Opposition pointing out, among others, that Subictel is not a proper party in this case since Subictel is
not a party to the JVA. The court granted Innove’s Motion to Dismiss and Subictel has filed a Motion
for Reconsideration. The Motion for Reconsideration was subsequently denied and Subictel has
appealed to the Court of Appeals. The appeal is pending.
On July 4, 2006, Smart Communications, Inc. (“Smart”) filed a letter-complaint with the National
Telecommunications Commission (“NTC”) against the 500 free text promotion offered by Innove on
its Speak and Surf product. The promotion allows Speak and Surf subscribers to send 500 free text
messages to Globe and Touch Mobile subscribers. Smart complained that this promotion was
predatory and discriminatory. On July 17 the NTC issued a Show-Cause order requiring Globe to
explain its position on this matter. On July 25, 2006, Globe filed its answer. In its answer, Globe
explained that Innove actually pays Globe the regular termination rate of P0.35 per text message, and
that the cost of the “free” texts are sufficiently covered by the monthly service charge of P995 paid by
Speak n’ Surf subscribers. In this light, the offer is neither discriminatory nor predatory. In its answer,
Globe also extended an invitation to Smart and other networks to join the promotional offer. Globe is
currently awaiting the disposition of the NTC on this matter.
MANILA WATER CO., INC.
The Company is not involved in any litigation it deems material.
MWCI became aware that certain individuals, claiming to represent consumer groups, filed a
complaint with the Office of the Ombudsman against certain individual regulators from Metropolitan
Waterworks and Sewerage System (“MWSS”), and MWCI’s President and members of the Board,
alleging that the respondents conspired to defraud the consuming public, charge water rates over and
beyond what is allowable by law and entered into agreements grossly disadvantageous to the
government, such acts constituting the crimes of graft and plunder. MWCI understands that, in the
complaint, the complainants allege that MWCI is a public utility and is therefore subject to the 12%
return on rate base limit for public utilities. From the limited information available to MWCI, MWCI
believes that the claims in the complaints are without merit. MWCI has not been given any formal
notice to respond to or comment on such complaints. In addition, one of the six individuals that
commenced the proceedings with the Office of the Ombudsman filed a complaint against MWCI with
the Regional Trial Court (“RTC”), National Capital Judicial Region, on February 28, 2005. The
complaint asks the RTC to issue an order permanently enjoining and restraining MWCI from charging
more than 12% of its return on rate base. The RTC has dismissed the case.
A criminal complaint was also filed with the Office of the Ombudsman against members of the MWSS
Board of Trustees and Regulatory Office and the presidents of MWCI and Maynilad Water Services,
Inc. (“Maynilad”), for a violation of Republic Act No. 3019 and for ‘conduct prejudicial to the best
interests of the service. The complaint arose from the water rate increases which became effective on
January 1, 2005. MWCI believes that the Ombudsman will most likely dismiss the complaint.
In June 2006, the Freedom from Debt Coalition petitioned the Supreme Court to annul the ruling of
the MWSS Board of Trustees that MWCI and Maynilad are not public utilities but agents and
contractors of MWSS. While MWCI is not impleaded as a respondent, certain contingent, adverse,
financial and regulatory consequences might result from a ruling granting the petition. The Company
believes that it is not a public utility but an agent and contractor of the MWSS, which remains as the
public utility, a position supported by Section 2.1 of the Concession Agreement, MWSS Board
Resolution dated July 30, 2004, National Water Resources Board (“NWRB”) Resolution dated June
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Legal Proceedings
17, 2005, and a Memorandum from the Office of the Government Corporate Counsel dated June 1,
2005.
IMI, AAHC and BPI are not involved in any material pending legal proceedings.
86
OWNERSHIP
SHAREHOLDERS
Members of the Zobel de Ayala family, individually and through their control of Mermac, Inc., a private
holding company incorporated in the Philippines, are the majority shareholders of and effectively
control Ayala. Mermac, Inc. held 50.9% of Ayala as of September 30, 2007. Members of the Zobel de
Ayala family have been involved in Ayala’s business since its establishment in 1834. As of September
30, 2007, Ayala’s other principal shareholders were Mitsubishi Corporation (10.6%) and Shoemart,
Inc. (3.2%).
Ayala’s 20 largest common shareholders as of September 30, 2007 were as follows:
Name of Shareholder
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
No of shares
Mermac, Inc.
PCD Nominee Corporation (Non-Filipino)
Mitsubishi Corporation
PCD Nominee Corporation (Filipino)
Shoemart, Inc.
Henry Sy, Sr.
AC ESOP/ESOWN Account – 2006
AC ESOP/ESOWN Account – 2005
Philippine Remnants Co., Inc.
BPI TA 14105123 FAO Consuelo Zobel
Alger Foundation
Cygnet Development Corporation
Mitsubishi Logistics
Antonio O. Olbes
Eduardo O. Olbes
Ariston Estrada, Jr.
AC ESOP/ESOWN Account
Tiu, Andre Jon
Telengtan Brothers & Sons, Inc.
Lucio Yan
Xavier Loinaz
%
Nationality
210,895,275
116,299,266
43,803,848
17,092,485
13,356,674
1,080,530
691,953
629,108
571,560
50.95%
28.10%
10.58%
4.13%
3.23%
0.26%
0.17%
0.15%
0.14%
Filipino
Foreign
Japanese
Filipino
Filipino
Filipino
Filipino
Filipino
American
316,381
306,763
250,356
195,993
163,328
161,040
138,816
109,442
95,040
88,887
87,476
0.08%
0.07%
0.06%
0.05%
0.04%
0.04%
0.03%
0.03%
0.02%
0.02%
0.02%
Filipino
Filipino
Japanese
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
* Mermac, Inc. and Mitsubishi Corporation are not members of a group as defined in the Securities Regulation Code’s
implementing rules and regulations.
87
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following table summarizes the financial highlights of Ayala’s consolidated financial performance:
Consolidated Income Statement Data
in P millions
(Unaudited)
As of June 30
2007
(Audited)
As of December 31
2006
2006
2005*
Income Statement Data
Total revenues
Net income
Net income attributable to
Minority interest
41,007
12,792
35,716
8,404
70,166
14,468
50,543
10,090
11,491
1,301
7,310
1,094
12,177
2,291
8,198
1,892
Consolidated Balance Sheet Data
in P millions
(Unaudited)
As of June 30
2007
(Audited)
As of December 31
2006
2005
Balance Sheet Data
Assets
Total current assets
Non-current accounts and notes receivable
Land and improvements – net
Investments in associates, joint ventures and
others
Investments in bonds and other securities
Investment in real properties – net
Property, plant and equipment – net
Other non-current assets
Total assets
62,359
3,891
16,189
69,514
58,012
2,520
16,175
68,569
46,508
5,631
16,604
63,808
5,189
16,347
9,097
7,631
3,462
16,795
9,057
7,742
2,073
17,012
9,917
6,293
190,217
182,332
167846
33,154
33,739
32,407
38,518
29,940
46,507
2,500
7,817
26,991
86,016
2,500
7,073
24,699
77,135
2,500
6,116
21,589
61,194
190,217
182,332
167,846
Liabilities
Total current liabilities
Long-term debt - net of current portion
Cumulative redeemable preferred shares – net of
current portion
Other non-current liabilities
Minority interest
Total liabilities and equity
* Restated in 2006 to effect new accounting standards.
88
Management’s Discussion and Analysis of Results of Operations and Financial Condition
KEY PERFORMANCE INDICATORS OF AYALA AND SUBSIDIARIES AND AFFILIATES
(in P millions)
Ayala Corporation (Consolidated)
June 30, 2007
Revenues
Net Income
Total Assets
Total Debt
Stockholder’s Equity
Current Ratio
41,007
11,491
190,217
47,082
86,016
1.88 x
0.55 x
June 30, 2006
Dec 31, 2006
Dec 31, 2005
35,716
7,310
177,533
53,930
66,312
1.43 x
0.81 x
70,166
12,177
182,332
52,881
77,136
1.70 x
0.69 x
50,543
8,198
167,846
60,377
61,194
1.55 x
0.99 x
•
Current ratio is the ratio between current assets or near-cash items, such as cash, accounts
receivable and inventories, among others, and current or short-term liabilities, which include
accounts payable, short-term debt and income tax, etc. and which are payable within one year.
Thus, at end-2006, Ayala’s current ratio of 1.79x implies that for every unit of short-term liability,
there corresponds over a unit and a half of near-cash assets. At end-2005 Ayala had 1.55 units
of current assets for every current liability.
•
Debt-to-equity ratio of 0.69x as at end-2006 means that Ayala’s amount of total debt was
equivalent to sixty-nine percent (69%) of the amount of shareholders’ funds.
Ayala Land, Inc.
P millions
Revenues
Net Income
Total Assets
Total Debt
Current Ratio
December 31, 2006
25,559
3,866
78,196
13,116
40,597
1.64
0.32
December 31, 2005
21,375
3,617
71,810
10,723
38,448
1.55
0.28
* As restated
•
Each unit of short-term liability of Ayala Land corresponds to 1.64 units of its near-cash assets at
end-2006.
•
Debt-to-equity ratio of 0.32 means that debt was only 32% of Ayala Land’s stockholders’ equity.
Bank of the Philippine Islands
P millions
Interest Income
Net Income
Total Resources
Total Liabilities
Capital Funds
December 31, 2006
33,754
9,040
581,970
516,483
581,970
89
December 31, 2005
30,537
8,383
529,285
469,217
60,068
Globe Telecom, Inc.
P millions
Net Income
Total Assets
Total Debt
Current Ratio
December 31, 2006
59,949
11,755
124,580
39,207
56,948
0.94
0.69
December 31, 2005
58,748
10,315
125,102
49,693
51,619
0.90
0.96
•
Globe’s short-term liabilities are almost equivalent to near-cash assets, with a current ratio of
0.94:1 at end-2006.
•
Globe’s debt level dropped from 0.96:1 at end-2005 to 0.69:1 at end-2006.
FOR SIX MONTHS ENDED JUNE 30, 2007
Ayala’s consolidated net income in the first half of 2007 reached P11.5 billion, 57% higher than
earnings in the first half of 2006. Despite the impact of some exceptional items, the fundamental
operating performance of its major business units remained strong and kept equity earnings stable
year-on-year at P6.4 billion. This combined with value realization initiatives and significantly lower
financing expense drove overall earnings higher.
Ayala President and Chief Operating Officer, Fernando Zobel de Ayala said, “we are pleased to see
the underlying strength of our key businesses. We continue to see strong demand across most of our
businesses with our telecom and banking units in particular achieving record revenue growth in the
second quarter. Clearly this is reflective of the positive trends we have been seeing in the broader
economy as we continue to see healthy domestic consumption underpinning the growth in the
consumer and services sector.”
Property unit Ayala Land, Inc., which accounts for 18% of the group’s equity earnings, posted a 12%
net income growth to P2.1 billion. Demand for Ayala Land’s projects remained strong across most
business lines. Overall demand for residential projects continued to grow with unit bookings up 69%
versus the same period last year. Revenues from shopping centers were up 9% driven by higher
average occupancy rate and higher average rent. Net operating income margins also improved for
the Company’s major business lines. Ayala Land’s earnings would actually have grown by a more
robust rate of 24% year-on-year, excluding the after-tax impact of gains from the sale of Oakwood
this year and the Atrium last year.
Banking unit Bank of the Philippine Islands (BPI) turned in a 24% increase in net income to P5.7
billion for the first semester. Total revenues were up 18% driven by higher net interest and noninterest income. Net interest income grew by 7% despite lower net interest margins, due to a 10%
improvement in its average asset base. Non-interest income grew by 37% with the strong earnings of
the bank’s insurance subsidiaries, higher income from asset sales, rental income, and foreign
exchange and securities trading gains. The bank maintains its leadership in the trust business with
over P230 billion in assets managed. Loan growth was more robust at 11%, the fastest organically
driven growth recorded in the past seven years and ahead of industry’s 6.1%. Lending growth was
noted in all sectors but SME/middle market showed the strongest at 13%, while mortgage loans in the
consumer sector were the highest with an 18% improvement. With the sale of an additional P3.6
billion worth of NPLs, BPI’s NPL fell further to 4.2% from 6.1% a year ago and is lower than the
industry’s 5.3% (as of May-07).
Its telecom business, Globe Telecom, recorded historical high revenues and core net income in the
second quarter. Overall, wireless service revenues expanded by 12% in the first semester mainly
90
driven by the sustained popularity of unlimited SMS and bucket voice offers, as well as higher prepaid
top-up levels. Wireless subscribers now total over 18 million, 30% higher versus June 2006 levels. Its
wireline business continued to register modest growth with revenues up 3% driven by the continued
growth of the broadband segment following significant improvements in its broadband subscriber
base. Consolidated EBITDA and EBIT increased by 11% and 15% year-on-year, to P20.9 billion and
P12.6 billion, respectively. EBITDA margins stood at a healthy 66%, while EBIT margins were at 40%
from 38% last year. This puts Globe’s net income after tax as of the first half of the year at P6.4
billion, 12% higher year-on-year. Excluding the impact of the bond redemption costs and foreign
exchange mark-to-market gains or losses in the first quarter of this year, core net earnings of P7.4
billion for the first half grew faster at 20% from last year’s P6.1 billion.
MWC posted an 18% growth in operating revenues in the first half of the year to P3.5 billion. This was
attributed to higher billed volumes, which reached a record high of 1.05 billion liters per day, a 13%
increase year-on-year. This was an offshoot of its expansion programs which enabled the Company
to add 61,000 new household connections during the first six months, bringing total households
served to 953,000. With consistent improvements in operating efficiency, non-revenue water (NRW)
dropped further to 25% as of end June, four percentage points lower than the previous year’s level.
While pre-tax income rose by 30%, the expiration of the Company’s income tax holiday in 2006
pushed net income 9% lower to P1.1 billion for the first half of the year.
Its electronics business, Integrated Microelectronics, Inc. posted a 4% growth in revenues to US$199
million but higher general and administrative expenses related to its integration projects resulted in a
30% decline in net income during the period. IMI remains competitive in the global market
notwithstanding the recent appreciation of the peso given its strong customer relationships and
proven capability to deliver quality products and services to its global customers. It recently expanded
its manufacturing capacity with a 12,500 square-foot facility in Shenzhen, which is its fifth plant in
China.
Proceeds from Ayala’s value realization initiatives and healthy dividend flows from subsidiaries put
the parent’s cash level at P20 billion by the end of the first half, giving the Company flexibility to
further reduce debt and financing expenses. Net debt as of the end of the first semester was at P13
billion with net debt to equity at 0.15 to 1 from 0.29 to 1 at the start of the year. The Company
continued to aggressively pre-pay debt and refinance existing obligations to take advantage of the
low interest rate environment. Year-to-date July it has pre-paid around P7 billion in outstanding loans
and lowered financing cost.
Ayala Chairman and CEO, Jaime Augusto Zobel de Ayala noted, “the group’s financial position is at
its strongest in the past decade and we are pursuing our efforts to expand the group’s growth
platform in new sectors. We continue to nurture our initial investments in the BPO space and continue
to explore other industries that are beginning to open up and presenting opportunities for broader
private sector participation.”
FOR TWELVE MONTHS ENDED DECEMBER 31, 2006
It was another record year for Ayala Corporation as net income reached an all-time high of P12.2
billion, 49% higher than 2005 net income of P8.2 billion. This was a result of the strong earnings of
the operating units, lower interest expense, and gains from share sales. At the holding Company
level, equity earnings excluding dilution gains booked in 2005 grew by 12% to P12.3 billion as all key
businesses posted significant earnings growth. Earnings were further enhanced by capital gains of
P4.7 billion from the sale of shares in Ayala Land, BPI, and Globe. This monetization initiative is in
line with the Company’s strategy to realize values from existing investments and reallocate resources
into new high growth businesses as well as further reduce debt. Net debt at the holding Company
level by year-end was significantly lower at US$462 million.
On a consolidated basis, sales and services rose by 54% to P53.4 billion. The substantial increase is
attributed to Ayala Land’s increased sales of land and condominium units during the year as demand
91
remained brisk for residential projects across all market segments. Its revenues from its commercial
center operations likewise contributed to the strong revenue growth as the year saw higher basic rent,
the full operation of Phase 1B of Market! Market!, and higher occupancy rates. The electronics
business also contributed to pushing consolidated revenues higher as IMI’s revenues more than
doubled during the year, reflecting the impact of the acquisition of Speedy Tech as well as organic
growth. The auto dealerships likewise contributed to revenue growth with Ayala Auto’s sales up 24%
year-on-year.
Equity in net earnings of associates and joint ventures was relatively flat in 2006 at P8.3 billion as
2005 included dilution gains from the initial public offering of MWC in March 2005. This primarily
reflects Ayala’s share in the net earnings of BPI, Globe, and MWC. All three businesses posted
record net income in 2006, with BPI’s up 8% to P9.0 billion, Globe up 14% to P11.8 billion, and
MWC’s by 19% to P2.4 billion.
Interest fees, rental, investment and other income grew by 11% to P8.5 billion largely due to gains
from the sale of shares of Ayala Land, BPI, and Globe. Ayala monetized some of these shares in
view of new investments it is currently making in the business process outsourcing sector as well as
an investment in a private equity real estate fund which has development projects lined up overseas.
The sale of these shares allowed us to realize values from these long-time investments and also gave
us the flexibility to pay out, for the first time in a decade, special cash dividends to shareholders.
Consolidated cost of sales and services increased by 56% to P40.9 billion and moved much in line
with revenue growth. General and administrative expenses increased by 28% to P7.7 billion as a
result of higher payroll costs due to additional hiring to support the expansion initiatives at IMI and
Ayala Land.
Consolidated interest and other charges declined by 28% to P5.4 billion. This was a result of a
combination of lower debt at the parent level as well as Ayala Land’s asset write-offs in 2005.
Consolidated cash and cash equivalents increased slightly to P23.1 billion as of year-end 2006 from
P24.0 billion at the beginning of the year. The increase was mainly due to higher cash levels at the
parent level given the strong cash dividend flows upstreamed by the operating units and various fund
raising initiatives. Total cash dividends received from subsidiaries reached P5.5 billion.
By year-end 2006, net debt at the parent Company level declined to US$462 million from US$563
million at the beginning of the year. A portion of our debt was paid in 2006 through the issuance of
P5.8 billion in Series B preferred shares which now forms part of our stockholders’ equity. While the
preferred B shares do not have a fixed redemption period, Ayala has the option to redeem these
shares after five years. This has caused the Company's debt mix to move substantially in favor of the
peso with 69% of the debt in local currency and 31% in US dollars. The current level of net debt puts
the net debt-to-equity ratio down to 0.29 to 1 from 0.49 to 1 at the beginning of the year.
At the consolidated level, total debt also declined by 12% to P52.9 billion from P60.4 billion with
consolidated net debt to equity at 0.39 to 1. Total stockholders’ equity at year-end reached P77.1
billion up 26% from the previous year.
In the Philippine Stock Exchange, the Company’s stock price closed at a year-high of P590.00 per
share, buoyed by the Company’s positive fundamentals and the market’s generally robust
performance. The strong peso, steady inflation, interest rates at all-time lows, sustained economic
growth and well contained budget deficit have all contributed to sustaining the market’s bullish
momentum. The generally upbeat mood throughout the year pushed the Philippine Composite Index
(Phisix) to close 42% higher year-on-year at 2,982.54.
Ayala’s listed operating units performed well. Ayala Land closed the year with a 54% increase in its
share price to P15.25. BPI rose 40% to P63.50 at year-end. Globe advanced 68% to P1,235.00 and
MWC gained 52% to close at P9.40.
92
Ayala Corporation’s market capitalization at the end of the year reached P203.45 billion, the third
highest among locally listed issues. Collectively, the market cap of the five listed Ayala companies
accounted for 29% of the Phisix’s total market capitalization. The 87% increase in Ayala’s share price
from its yearend 2005 level and the higher full-year dividend yield of around 2% resulted in an
estimated total return to shareholders of 89% from end-2005.
INCOME STATEMENT
2005 was a banner year for Ayala as consolidated net income reached a record of P8.2 billion, a
11.5% growth from 2004 net income of P7.4 billion. This was largely the result of the collective strong
performance of Ayala’s key operating subsidiaries which resulted in a 10% growth of its equity
earnings as well as gains from share sales. In 2005, a total of P1.1 billion in capital gains were
realized at the holding company level from the sale of shares in MWC and ALI. Dilution gains were
likewise realized primarily from the MWC IPO, the merger of Ayala’s electronics subsidiary with
Speedy Tech, and BPI’s acquisition of Prudential Bank. Excluding gains, 2005 net income would be
21% higher than recurring net income in 2004.
On a consolidated basis, sales and services grew 15% to P35.3 billion. This primarily captures the
robust revenues of the Company’s property subsidiary combined with higher sales from IMI. The
successful launch of new residential development projects, higher leasing revenues from shopping
centers, office buildings and hotels as well as higher construction revenues boosted topline growth.
This was further pushed by higher sales volumes of IMI as volume orders from existing businesses
and incremental contribution from the operations of newly acquired companies pushed IMI’s revenues
by 63% year-on-year.
Ayala’s equity in net earnings of associates and joint ventures increased by 8% to P8.2 billion,
reflecting its higher share in net earnings from operating subsidiaries. BPI posted a record net income
for the year of P8.4 billion, pushing Ayala’s equity earnings from the banking subsidiary higher by
24%. MWC also posted a historic high income of P2.0 billion, increasing Ayala’s equity earnings from
this subsidiary by 70%. The latter includes dilution gains from MWC’s IPO in March 2005. Growth in
equity earnings however was partly capped by lower equity earnings from Ayala’s telecom subsidiary
Globe. Globe registered lower earnings during the year as a result of higher network and marketing
related expenses exacerbated by a higher provision for taxes following the expiration of its income tax
holiday. Ayala remains confident of Globe’s profitability and growth potential moving forward as it
continues to strengthen its competitive position with an expanded network coverage, a range of
innovative value add services, better cost management and as it uses new technology to tap into new
revenue streams. Globe has achieved a positive momentum and ended 2005 on a strong note as it
posted a historic high income in the fourth quarter.
Consolidated interest, rental and other investment income increased by 30% to P6.7 billion due
mainly to ALI’s gains from the sale of its stake in the MRT-3 project in the first quarter of the year.
Consolidated cost of sales and services increased by 20% to P26.9 billion along with the increase in
sales volume and also due to the shift of some IMI customers from consignment to turnkey
arrangement which includes material costs. General and administrative expenses increased by 12%
to P5.9 billion mainly due to higher payroll costs given the expansion moves of some of the
Company’s subsidiaries. Consolidated interest and other charges likewise increased by 12% to P7.5
billion largely as a result of asset write-offs by the real estate group. Interest expense, however, was
lower as consolidated debt declined.
93
BALANCE SHEET
The Group’s overall financial position continued to improve. In 2005, consolidated gross debt
decreased by 19% to P60.4 billion while debt at the parent level was reduced further to P44.9 billion
from P60.6 billion at the beginning of the year. This resulted in a drop in parent level financing cost by
17% as debt mix also continued to move in favor of peso-denominated loans. At year-end, debt mix
at the holding company level was at 61% Peso and 39% U.S. Dollars as Ayala took advantage of
opportunities to shift its dollar-denominated borrowings to peso when appropriate. Following its
landmark offer of P7.0 billion peso bonds in 2004, Ayala issued in 2005 two Peso fixed rate notes - a
five-year P3.0 billion peso note and another seven-year P4.2-billion peso note - in line with this
strategy.
Ayala’s consolidated cash and cash equivalents decreased by 30% as of year-end to P24.6 billion as
loans of about P20.7 billion were paid down mainly at the parent level. Cash at the parent level also
decreased to P15.0 billion or roughly U.S.$283 million. This, however, was partly offset by higher
cash dividends received from subsidiaries. Cash dividends received from subsidiaries reached its
highest in 2005 to P6.7 billion.
Consolidated net debt-to-equity improved further to 0.58 to 1 from 0.74 to 1 while net debt-to-equity at
the parent level likewise improved to 0.49 to 1 from 0.68 to 1. Total stockholders’ equity at year end
reached P61.3 billion, up 15% from the previous year.
(Not restated to conform to Philippine Financial Reporting Standards)
INCOME STATEMENT
In 2004, Ayala earned a net income of P7.1 billion, 130% higher than 2003. The strong performance
was driven by the robust growth of key operating subsidiaries and affiliates and was further enhanced
by a P2.6 billion gain from the sale of the company’s 5% stake in Globe.
Consolidated revenues grew 17% to P43.7 billion due to higher sales of subsidiaries, particularly ALI
and IMI. ALI revenues rose 23% during the year driven by increased sales of residential units across
nearly all segments and higher rental income from retail and office building operations. IMI revenues
increased 21% with the sustained high demand from its key customers. AAHC however registered a
decline in revenues of 23% as the domestic auto industry continued to face challenges from the new
excise tax scheme, which negatively impacted demand for AUVs.
Consolidated costs and expenses were well managed, pushing aggregate gross margin two
percentage points higher. IMI substantially improved profitability with improved efficiencies and better
utilization of overhead. While ALI’s gross margin contracted slightly as a result of the shift in product
mix to lower margin products, AAHC gross margin remained stable. The three subsidiaries combined
accounted for about 74% of consolidated revenues.
Equity in net earnings of associates and other investment income contributed substantially to
earnings and was 1.5 times higher than last year. The increase was underpinned by a 21% growth in
equity earnings from Globe, BPI and MWC, and capital gains from the Company’s sale of Globe
shares as well as real properties by AIPL. Of the total equity earnings generated for the year, Globe
contributed 41%, while ALI and BPI each contributed 19% and 18%, respectively. The balance of
22% was accounted for by companies under AC Capital.
Consolidated general and administrative expenses increased by 16% due mainly to additional
expenses related to the expansion of ALI subsidiaries such as Ayala Land Sales, CII and Serendra.
Provisions for retirement fund contributions also accounted for the increase in general and
94
administrative expenses. Consolidated interest and other financing charges meanwhile increased
mildly by 3% with a higher loan balance at the parent level as the company pre-funded debt maturing
in early 2005 (see Balance Sheet).
BALANCE SHEET
Ayala ended 2004 with consolidated assets of P167.9 billion, 14% higher than 2003. Current assets
amounted to P53.2 billion, maintaining a healthy current ratio of 1.86:1. Total cash and cash
equivalents increased 95% to P34.9 billion, with most of the increase accounted for at the parent level
following proceeds from new loans availed to refinance existing debt. In 2004, Ayala Corporation
issued a P7.0 billion five-year bond, the biggest offer by a corporate issuer in the Philippine capital
markets, as part of its efforts to shift dollar denominated loans to peso. The bond was rated triple A by
Philratings and was priced tightly at 12.677% p.a., relative to the five-year market benchmark. As of
year end, debt mix at the parent level improved substantially to 58% U.S. Dollars and 42% Peso from
73% U.S. Dollars and 27% Peso at the end of the previous year. In addition, higher dividends
received from subsidiaries also boosted cash levels. The increase in consolidated cash was also
aided in part by proceeds from the sale of ALI’s stake in Pilipinas Makro, office units at Ayala Life
FGU as well as AIPL’s proceeds from the sale of Grosvenor Place.
Consolidated gross debt increased to P68.0 billion mainly as a result of refinancing efforts at the
parent level. About 80% of consolidated debt is held at the parent level, up from P45.0 billion or 75%
of consolidated debt in 2003. Consolidated net debt however declined to P33.0 billion from P42.0
billion the previous year as ALI reduced its debt. Ayala’s consolidated net debt-to-equity ratio
improved to 0.57 to 1 during the year from 0.78 to 1. Ayala’s stockholders’ equity stood at P59.0
billion at year-end 2004, 9.3% higher than the previous year.
Causes for any material changes
(Increase or decrease of 5% or more in the financial statements)
Balance Sheet items
(2006 Vs 2005)
Accounts and notes receivable – 54% increase from P11,308mln to P17,470mln
Largely due to receivables from the sale of shares, increased sales at new and existing projects and
higher corporate withholding tax by the real estate group, advances by the international group to
finance new investments and increased sales by the electronics, information technology and business
process outsourcing services and automotive groups. As a percentage to total assets, accounts and
notes receivable increased from 7% as of December 31, 2005 to 10% as of December 31, 2006.
Inventories – 9% increase from P8,999mln to P9,804mln
Attributable to the real estate group’s construction accomplishment at residential building projects and
continued development of residential subdivision projects. Inventories remained at 5% of the total
assets as of December 31, 2006 and December 31, 2005.
Other current assets – 81% increase from P2,190mln to P3,961mln
Due to advances on land, increase in marketable securities and higher input VAT by the real estate
group, inclusion of accounts of a new subsidiary under the electronics, information technology and
business process outsourcing services group and additional investments in marketable securities by
the international group. Other current assets increased to 2% of the total assets as of December 31,
2006 from 1% as of December 31, 2005.
95
Noncurrent assets held for sale – 100% increase to P3,658mln
Represents total assets of Makati Property Ventures Inc., a member of the real estate group and
investment in Hermill Investment Pte. Ltd. of the international group classified as noncurrent assets
held for sale.
Noncurrent account and notes receivable – 55% decrease from P5,631mln to P2,520mln
Mainly due to sale of receivables by one of the companies of the real estate group. As a percentage
to total assets, noncurrent account and notes receivable slightly decreased from 3% as of December
31, 2005 to 1% as of December 31, 2006.
Investments in associates and joint ventures – 7% increase from P63,808mln to P68,569mln
Investments in associates joint ventures and others includes the Company’s and its subsidiaries’
investments in various affiliates which are being accounted for under the equity method. These
affiliates are Bank of the Philippine Islands, Globe Telecom and MWC Corporation, among others.
The increase is largely due to the 2006 equity in earnings from affiliates and additional equity infusion
by subsidiaries in an Asian private equity real estate fund and fund management Company. This
account is 38% of the total assets as of December 31, 2005 and December 31, 2006.
Investment in bonds and other securities – 67% increase from P2,073mln to P3,462mln
Primarily due to new investments made in 2006 by the electronics, information technology and
business process outsourcing services group and revaluation of investments partly offset by the sale
of securities at the Parent Company level. As a percentage to total assets, this account is 2% and 1%
as of December 31, 2006 and December 31, 2005, respectively.
Property, plant and equipment – 9% decrease from P9,918mln to P9,057mln
Reclassification by the real estate group to Noncurrent assets held for sale partly offset by the
inclusion of assets of the newly acquired subsidiaries under the electronics, information technology
and business process outsourcing services group. This account is 6% and 5% of the total assets as
of December 31, 2005 and December 31, 2006, respectively.
Pension assets – 14% decrease from P236mln to P203mln
Lower pension assets of the electronics, information technology and business process outsourcing
services group. This account remained at 0.1% of the total assets as of December 31, 2006 and
December 31, 2005.
Intangible Assets– 55% increase from P2,996mln to P4,129mln4,631mln
Largely due to the acquisition of a new subsidiary partly offset by the amortization of intangible assets
by the electronics, information technology and business process outsourcing services group. As a
percentage to total assets, this account is 3% as of December 31, 2006 and 2% as of December 31,
2005.
Other noncurrent assets – 8% decrease from P1,947mln to P1,785mln
Due to liquidation of advances made by the real estate group to a landowner and lower deferred
charges by the Parent Company. As a percentage to total assets, this account remained at 1% as of
December 31, 2005 and December 31, 2006.
96
Accounts payable and accrued expenses –6% increase from P17,311mln to P18,326mln
Primarily due to higher payables to contractors and suppliers and higher VAT and expanded
withholding tax payable by the real estate group, inclusion of payables of the newly acquired
companies of the electronics, information technology and business process outsourcing services
group and the Parent Company’s higher dividends payable partly offset by lower interest payable due
to lower loan balance.
As of December 31, 2006 and December 31, 2005, this account is at 23% and 20% of the total
liabilities, respectively.
Short-term debt – 59% decrease from P6,154mln to P2,504mln
Largely due to payment of short-term debt by the electronics, information technology and business
process outsourcing services group used to finance acquisition of new companies in 2005. As of
December 31, 2006 and December 31, 2005, this account is at 3% and 7% of the total liabilities,
respectively.
Income-tax payable – 8% increase from P273mln to P296mln
Due to higher income subject to income tax.
Current portion of long-term debt – 214% increase from P2,985mln to P9,360mln
Reclassification of the real estate group’s P3bln bonds which will mature in April 2007, as well as
reclassification of the Parent Company’s and the electronics, information technology and business
process outsourcing services group’s current maturing loans. As a percentage to total liabilities,
current portion of long-term debt is 12% and 4% as of December 31, 2006 and December 31, 2005,
respectively.
Cumulative redeemable preferred shares (current portion ) – 100% decrease from P2,230mln
Redemption of the P2,230mln redeemable preferred shares in 2006 by the Parent Company. As a
percentage to total liabilities, the cumulative redeemable preferred shares is 3% as of December 31,
2005.
Other current liabilities – 47% increase from P986mln to P1,453mln
Largely due to higher buyer deposits from various residential projects by the real estate group and
revaluation of advances by the Parent Company. This is 2% and 1% of the total liabilities as of
December 31, 2006 and December 31, 2005, respectively.
Liabilities Directly Associated with Noncurrent Assets Held for Sale– 100% increase to P469mln
Represents total liabilities of Makati Property Ventures Inc., a member of the real estate group
classified as noncurrent assets held for sale.
Long-term debt – 17% decrease from P46,507mln to P38,518mln
Mainly due to payment of loans and reclassification to current portion. As a percentage to total
liabilities, long-term debt is at 48% and 55% as of December 31, 2006 and December 31, 2005,
respectively.
97
Deferred tax liabilities – 42% increase from P312mln to P444mln
Higher tax liability from prior years’ installment sales of the real estate group due to shift in revenue
recognition from percentage of collection to percentage of completion. As a percentage to total
liabilities this account is 0.6% as of December 31, 2006 and 0.4% as of December 31, 2005.
Pension and other benefits – 12% increase from P434mln to P488mln
Mainly due to the Parent Company’s increase in retirement fund contribution. As a percentage to total
liabilities, pension and other benefits slightly increased from 0.5% as of December 31, 2005 to 0.6%
as of December 31, 2006.
Other noncurrent liabilities – 14% increase from P5,370mln to P6,141mln
Higher retention payable and deferred interest income by the real estate group. As a percentage to
total liabilities, this account is at 8% as of December 31, 2006 and 6% as of December 31, 2005.
Paid-up-Capital – 36% increase from P16,960mln to P23,138mln
Due mainly to the issuance of P5.8bln preferred shares in 2006.
Share-based payments – 15% decrease from P656mln to P558mln
Mainly due to additional stock options exercised.
Cumulative translation adjustment – 151% decrease from P587mln to ( P298mln)
Mainly due to forex rate changes.
Net unrealized gain on available-for-sale investments 335% increase from P478mln to P2,079mln
Largely to increase in value of various investments of an affiliate bank and the electronics, information
technology and business process outsourcing services group.
Minority interest – 14% increase from P21,590mln to P24,699mln
Largely due to share of minority holders in the 2006 net income and increased share due to sale of
shares by the equity holders of Ayala Corporation.
Income Statement items
(YTD December 2006 Vs YTD December 2005)
Sales and services – 54% increase from P34,638mln to P53,394mln
Higher revenues from residential developments, shopping centers, office rentals and support
businesses of the real estate group, contributions from the operations of newly acquired companies
by the electronics, information technology and business process outsourcing services group and
higher sales volume by the automotive group.
Sales and services contributed 76% and 69% of the total revenue in 2006 and in 2005, respectively.
Equity in net earnings of associates and joint ventures – 0.6% increase from P8,202mln to P8,253mln
Largely due to higher share in net earnings from various affiliates such as Bank of the Philippine
Islands, Globe Telecom and Ayala Land Inc.’s affiliates such as Alabang Commercial Corporation
98
and Cebu Holdings, Inc., partly offset by the absence of dilution gain arising from MWC Corporation’s
initial public offering in 2005.
In 2006, this account is 12% of the total revenue lower than the 16% in 2005.
Interest fees, rental investment and other income – 11% increase from P7,702mln to P8,519mln
Largely due to capital gains from sale of shares in 2006. This account is 12% of the total income in
2006, lower than the 15% in 2005.
Cost of sales and services – 56% increase from P26,170mln to P40,857mln
Relative to higher sales. This account is 76% of total costs and expenses in 2006 compared to 66%
in 2005.
General and administrative expenses –28% increase from P6,011mln to P7,708mln
Due to higher payroll and benefits costs and expansion of some subsidiaries. This amount is 14% of
total costs and expenses in 2006, lower than the 15% in 2005.
Interest and other charges – 28% decrease from P7,563mln to P5,411mln
Due to provisions for decline in value of assets intended to be sold and write-off of deferred charges
of the real estate group in 2005 and lower interest payables due to lower debt levels in 2006 at the
parent Company level. This account is 10% of total costs and expenses in 2006 and significantly
lower than the 19% in 2005.
Provision for income tax – 124% increase from P839mln to P1,877mln
Lower final tax rate in 2005 on capital gains in AIVI transaction coupled with higher corporate income
tax rate in 2006.
Balance Sheet items
(2005 Vs 2004)
Cash and cash equivalents – 30% decrease from P34.94 billion to P24.61 billion
Due to payment of loans, disbursements by some subsidiaries for new investments, redemption of
preferred shares partly offset by proceeds from sale of shares of stocks, cash dividends received net
of dividends paid. As a percentage to total assets, cash and cash equivalents decreased from 20% to
14% as of December 31, 2004 and December 31, 2005, respectively.
Accounts and notes receivable – 12% increase from P12.56 billion to P14.03 billion
Receivables of newly acquired companies by the electronics and information technology group partly
offset by the sale of receivables by the real estate group. As a percentage to total assets, accounts
and notes receivable slightly increased from 7% as of December 31, 2004 to 8% as of December 31,
2005.
Inventories – 39% increase from P6.48 billion to P9.0 billion
Primarily due to the higher direct materials inventory level as a result of increased production orders
of the electronics and information technology group and reclassification of a real estate property in
Makati City to inventories by the real estate group. Inventories were 5% and 4% of the total assets as
99
Non-current account and notes receivable – 23% increase from P6.93 billion to P8.52 billion
Largely due to increase in installment sales by the real estate group. As a percentage to total assets,
non-current account and notes receivable slightly increased from 4% as of December 31, 2004 to 5%
as of December 31, 2005.
Land and improvements – 10% decrease from P17.99 billion to P16.16 billion
Due to reclassification of a Makati City property to inventories. This account was 9% and 10% of the
total assets as of December 31, 2005 and December 31, 2004, respectively.
Investments in associates and joint ventures – 3% increase from P60.43 billion to P62.08 billion
investments in various affiliates which are being accounted for under the equity method. Among
these affiliates are BPI, Globe and MWC, among others.
The increase is largely due to the 2005 equity in earnings from affiliates which was partly offset by the
decrease in shareholdings in some affiliates. This account is 36% of the total assets as of December
31, 2005 and 35% as of December 31, 2004.
Investment in bonds and other securities – 6% decrease from P2.58 billion to P2.44 billion
Due to sale of Astoria Investment Ventures, Inc. preferred shares and fair value losses on some club
share investments by the real estate group. This account was 1% and 2% of the total assets as of
December 31, 2005 and December 31, 2004, respectively.
Investments in properties – net –5% increase from P17.44 billion to P18.31 billion
Largely due to investments in new office and shopping center projects. This account was 11% and
10% of the total assets as of December 31, 2005 and December 31, 2004, respectively.
Property, plant and equipment – 21% increase from P8.00 billion to P9.69 billion
Acquisition of new machineries and equipment and inclusion of assets of the newly acquired
companies by the electronics and information technology group. This account was 6% and 5% of
the total assets as of December 31, 2005 and December 31, 2004, respectively.
Deferred tax assets – 59% increase from P829 million to P1.32 billion
Due to deferred tax assets related to provisions made. As a percentage to total assets, this account
was 0.8% as of December 31, 2005 and 0.5% as of December 31, 2004.
Pension assets – 103% increase from P117 million to P236 million
Higher pension assets of the electronics and information technology group. This account remained
at 0.1% of the total assets as of December 31, 2005 and December 31, 2004.
Goodwill – 1,107% increase from P297million to P3.58 billion
Largely due the Asset Purchase Agreement entered into by the electronics and information
technology group. As a percentage to total assets, this account was 2% as of December 31, 2005
and 0.2% as of December 31, 2004.
Other noncurrent assets – 27% increase from P1.44 billion to P1.83 billion
Due to deposit made for Manila Jockey Club’s 6.5-hectare property. As a percentage to total assets,
this account was 1% and 0.8% as of December 31, 2005 and as of December 31, 2004, respectively.
100
Accounts payable and accrued expenses – 45% increase from P9.51 billion to P13.81 billion
Primarily due to higher materials payable, increased accruals and inclusion of payables of the newly
acquired companies of the electronics and information technology group and increase in contractors
payable of the real estate group. As of December 31, 2005 and December 31, 2004, this account
was at 15% and 10% of the total liabilities, respectively.
Short-term debt – 183% increase from P2.17 billion to P6.15 billion
Short-term borrowings by the electronics and information technology group used to finance
acquisition of new companies, partly offset by the repayment of loans by the real estate group. As of
December 31, 2005 and December 31, 2004, this account was at 7% and 2% of the total liabilities,
respectively.
Current portion of long-term debt – 77% decrease from P13.18 billion to P2.99 billion
Mainly due to payment of loans. As a percentage to total liabilities, current portion of long-term was
3% and 13% as of December 31, 2005 and December 31, 2004, respectively.
Estimated liability for land and property development (current portion) – 27% increase from P3.04
billion to P3.88 billion
Due to new sales at existing and new projects. This account was 4% and 3% of the total liabilities as
Cumulative redeemable preferred shares (current portion) – 76% increase from P1.27 billion to P2.23
billion
Current maturing redeemable preferred shares in 2005. In 2004, preferred shares amounting to
P1.270 billion were redeemed. As a percentage to total liabilities, the cumulative redeemable
preferred shares were 2% and 1% as of December 31, 2005 and December 31, 2004, respectively.
Unrealized gain on real estate sales (current portion) – 55% increase from P720.0 million to P1.11
billion
Due to new sales at existing and new real estate projects. As a percentage to total liabilities,
unrealized gain on real estate sales was 1% and 0.7% as of December 31, 2005 and December 31,
2004, respectively.
Other current liabilities – 56% increase from P339.0 million to P529.0 million
Other current liabilities of the newly acquired companies by the electronics and information
technology group. As a percentage to total liabilities, other current liabilities were 0.6% and 0.3% as
Long-term debt – 12% decrease from P52.91 billion to P46.51 billion
Mainly due to payment of loans. As a percentage to total liabilities, long-term debt was at 51% and
54% as of December 31, 2005 and December 31, 2004, respectively.
Cumulative redeemable preferred shares (noncurrent portion) – 47% decrease from P4.73 billion to
P2.5 billion
Reclassification of redeemable preferred shares to current. As a percentage to total liabilities,
cumulative redeemable preferred shares were 3% and 5% as of December 31, 2005 and December
31, 2004, respectively.
Unrealized gain on real estate sales (non-current portion) – 27% decrease from P2.37 billion to P1.73
billion
101
Due to reclassification to current portion of unrealized gain on real estate sales. As a percentage to
total liabilities, unrealized gain on real estate sales remained at 2% as of December 31, 2005 and
December 31, 2004.
Deferred tax liabilities – 21% decrease from P396 million to P312 million
Reversal of tax provision in 2005. As a percentage to total liabilities this account was 0.3% as of
December 31, 2005 and 0.4% as of December 31, 2004.
Pension and other benefits – 56% decrease from P1.04 billion to P458 million
Mainly due to high 2004 base following set up of transitional liability representing benefit obligation
and funding of fund deficiency. As a percentage to total liabilities, pension and other benefits
decreased from 1% as of December 31, 2004 to 0.5% as of December 31, 2005.
Other noncurrent liabilities – 25% increase from P4.56 billion to P5.72 billion
Increase in tenants’ and buyers’ deposits. As a percentage to total liabilities, this account remained
at 6% as of December 31, 2005 and 5% as of December 31, 2004.
Cumulative translation adjustment – 41% decrease from P1.16 billion to P688.0 million
Mainly due to foreign exchange rate changes.
Share-based payments – 65% increase from P397.0 million to P656.0 million
Mainly due to amortization of stock options granted.
Net unrealized gain on available-for-sale investments - from nil to P478.0 million
Relative to the adoption of PAS 39 – Financial Instruments: Recognition and Measurement starting
January 1, 2005.
Minority interest – 10% increase from P19.57 billion to P21.46 billion
Largely due to the share of minority holders in 2005 net income
(YTD December 2005 Vs YTD December 2004)
Sales and services – 15% increase from P30.64 billion to P35.31 billion
Successful launching of new real estate projects, higher leasing revenues from shopping centers,
office buildings and hotels, higher construction revenues for the real estate group and higher sales
volume of existing businesses and contributions from the operations of newly acquired companies by
the electronics and information technology group.
Sales and services contributed 69% of the total income in 2005 and in 2004.
Equity in net earnings of associates and joint ventures – 8% increase from P7.62 billion to P8.20
billion
Largely due to higher share in net earnings from various affiliates such as BPI, MWC and ALI’s
affiliates such as ACC and CHI.
In 2005, this account is 16% of the total income slightly lower than the 17% in 2004.
Interest, rental and other investment income – 30% increase from P5.11 billion to P6.65 billion
Due to gain on sale and exchange of shares of stocks, dilution gain from subsidiaries and higher
interest income in 2005.
102
Cost of sales and services – 20% increase from P22.46 billion to P26.89 billion
Mainly due to increase in sales volume and increasing turnkey business of the electronics and
information technology group.
General and administrative expenses – 12% increase from P5.24 billion to P5.86 billion
Due to higher payroll and benefits costs and expansion of some subsidiaries.
Interest and other charges – 12% increase from P6.66 billion to P7.49 billion
Due to provisions for decline in value of assets intended to be sold and write-off of deferred charges
of the real estate group.
Provision for income tax – 38% decrease from P1.44 billion to P897 million
Lower income subject to 32% corporate income tax.
103
MANAGEMENT
BOARD OF DIRECTORS
Ayala’s Board has seven members, all of whom are elected by Ayala’s common stockholders at the
stockholders’ annual meeting. The Directors hold office for one year and until their successors are
elected and qualified in accordance with Ayala’s By-Laws.
The Board regularly meets at least on a quarterly basis. It ensures the presence and adequacy of
internal control mechanisms for good governance in accordance with the Company’s Manual of
Corporate Governance. The minimum internal control mechanisms for the Board’s oversight
responsibility include, but are not limited to:
(a) Ensuring the presence of organizational and procedural controls, supported by an effective
management information system and risk management reporting system;
(b) Reviewing conflict-of-interest situations and providing appropriate remedial measures for the
same;
(c) Appointing a CEO with the appropriate ability, integrity and experience to fill the role, as well as
defining the CEO’s duties and responsibilities;
(d) Reviewing proposed senior management appointments;
(e) Ensuring the selection, appointment and retention of qualified and competent management;
reviewing the Company’s personnel and human resources policies, compensation plan and the
management succession plan;
(f) Institutionalizing the internal audit function; and
(g) Ensuring the presence of, and regularly reviewing, the performance and quality of external audit.
As of March 30, 2007, the composition of the Board was as follows:
Board of Directors
Jaime Augusto Zobel de Ayala
Fernando Zobel de Ayala
Mercedita S. Nolledo
Meneleo J. Carlos, Jr.
Toshifumi Inami
Delfin L. Lazaro
Xavier P. Loinaz
Chairman and Chief Executive Officer
President and Chief Operating Officer
Director and Corporate Secretary
Independent Director
Director
Director
Director
Jaime Augusto Zobel de Ayala, Filipino, 47, has served as Director of Ayala Corporation since
1987. He also holds the following positions: Chairman and CEO of Ayala Corporation; Chairman of
the Board of Directors of Globe Telecom, Inc., Bank of the Philippine Islands and Integrated Microelectronics, Inc.; and Director of Ayala Land, Inc. He is also a member of various international and
local business and socio-civic organizations including the JP Morgan International Council, Mitsubishi
Corporation International Advisory Committee, Toshiba International Advisory Group, Harvard
University Asia Center Advisory Committee, Board of Trustees of the Asian Institute of Management
and a national council member of the World Wildlife Fund (US). He was a TOYM (Ten Outstanding
Young Men) Philippine Awardee in 1999. He graduated with B.A. in Economics (Cum Laude) at
104
Management
Harvard College in 1981 and took his MBA (with Distinction) at the Harvard Graduate School of
Business Administration in 1987.
Fernando Zobel de Ayala, Filipino, 46, has served as Director of Ayala Corporation since 1994. He
also holds the following positions: President and Chief Operating Officer of Ayala Corporation;
Chairman of Ayala Land, Inc., Manila Water Company, Inc., AC International Finance Ltd., Ayala
International Pte. Ltd., Ayala Hotels, Inc., Alabang Commercial Corp., and Anvaya Cove Beach and
Nature Club, Inc.; Co-Vice Chairman and Trustee of Ayala Foundation, Inc.; Director of the Bank of
the Philippine Islands, Globe Telecom, Inc., Integrated Micro-electronics Inc., and Habitat for
Humanity International. He graduated with B.A. Liberal Arts at Harvard College in 1982.
Aristón Estrada, Jr., Filipino, 66, has served as director of Ayala Corporation since 1983 and was
the Adviser to the Chairman of Ayala Corporation. He was formerly a director of AC International
Finance Ltd., Ayala DBS Holdings, Inc. and of the Bank of the Philippine Islands for 19 years from
1983 to 2002. He stepped down from the Board of Ayala Corporation effective 31 December 2006.
He graduated from the De La Salle University with a degree in A.B. Humanities (Summa Cum Laude)
in 1960 and B.S.C. Major in Accounting in 1962 (Summa Cum Laude). He placed First in the Board
Examinations for CPAs in 1962.
Meneleo J. Carlos, Jr., Filipino, 77, serves as the Independent Director of Ayala Corporation since
September 2002. He is the Chairman of Ayala Corporation’s Audit and Compensation Committees
and a member of the Nomination Committee. He is the Chairman and President of RI Chemical
Corporation; President of Resins, Inc., Riverbanks Development Corporation; Chairman of Maja
Development Corporation, AVC Chemical Corporation, Philippine Iron Construction & Marine Works,
Inc. (PICMW) and Vacphil Rubber Corporation; and Director of Philippine Aerosol Container Corp.
(PACC) and Cagayan Electric Power & Light Company (CEPALCO). He graduated with a B.Chemical
Engineering degree and a Certificate of Advanced Studies at Cornell University, Ithaca, New York
City in 1952.
Toshifumi Inami, Japanese, 55, has served as Director of Ayala Corporation since June 2006. He is
currently the General Manager of Mitsubishi Corporation - Manila Branch. He is the Chairman and
Director of International Elevator & Equipment, Inc. and a Director in the following companies: Isuzu
Philippines Corp., MD Distripark Manila, Inc., MD Laguna Corporation, Imasen Philippines
Manufacturing Corp., Kansai Paint Philippines, Kawashima Textile Mfg. Phils. Inc., Trans World AgroProducts Corporation, Kepco Ilijan Corporation, Mirant Diamond Holdings Corporation, UniCharm
Philippines Inc. and Robinsons Convenience Stores, Inc. Mr. Inami had a degree in Mechanical
Engineering from Keio University.
Delfin L. Lazaro, Filipino, 60, has served as a Consultant and a member of the Management
Committee of Ayala Corporation (Ayala Group) since 1996. He was elected to the Board of Ayala on
01 January 2007. He also holds the following positions: Director and Chairman of the Executive
Committee of Globe Telecom, Inc.; Director of Ayala Land, Inc., Integrated Micro-electronics, Inc.,
Manila Water Co., Inc. and Ayala Automotive Holdings Corp. Formerly, Mr. Lazaro was the President
and CEO of Benguet Corporation and Secretary of the Department of Energy of the Philippine
government. He was named Management Man of the Year 1999 by the Management Association of
the Philippines for his contribution to the conceptualization and implementation of the Philippine
Energy Development Plan and to the passage of the law creating the Department of Energy. He was
also cited for stabilizing the power situation that helped the country achieve successively high growth
levels up to the Asian crisis in 1997. He graduated with BS Metallurgical Engineering at University of
the Philippines in 1967 and took his MBA (with Distinction) at Harvard Graduate School of Business
in 1971.
Xavier P. Loinaz, Filipino, 63, has served as director of Ayala Corporation since April 2006. He was
a member of the Management Committee of Ayala Corporation (Ayala Group) from 1989 to 2004. He
was formerly the President of Bank of the Philippine Islands (BPI) from 1982 to 2004. Other positions
105
Management
held are: Director of BPI, BPI Capital Corporation, BPI Direct Savings Bank, Inc., BPI/MS Insurance
Corporation, BPI Family Savings Bank, Inc. and Chairman of the Board of Directors of Ayala Life
Assurance, Inc.; and Member of the Board of Trustees of BPI Foundation, Inc. He graduated with AB
Economics at Ateneo de Manila University in 1963 and took his MBA-Finance at Wharton School,
University of Pennsylvania in 1965.
Mercedita S. Nolledo, Filipino, 65, has served as Director of Ayala Corporation since 2004 and is
also a Senior Managing Director and Corporate Secretary of Ayala Corporation, and General Counsel
of the Ayala Group of Companies. Her other significant positions include: Director of Honda Cars
Cebu, Inc., Honda Cars Makati, Inc., Isuzu Automotive Dealership, Inc., Isuzu Cebu, Inc., Ayala
Automotive Holdings Corp., Bank of the Philippine Islands and Anvaya Cove Beach and Nature Club,
Inc.; Corporate Secretary and Member of the Board of Trustees of Ayala Foundation, Inc.; Director
and Treasurer of Phil. Tuberculosis Society, Inc. She had her education at University of the
Philippines and graduated Magna Cum Laude and Class Valedictorian in Bachelor of Science in
Business Administration and Cum Laude and Class Valedictorian in Bachelor of Laws.
EXECUTIVE OFFICERS
Ayala's various business interests are managed by the following members of senior management:
Management Committee Members/Key Officers
*
*
*
*
*
**
**
**
**
**
Aristón Estrada, Jr.
Delfin L. Lazaro
Gerardo C. Ablaza, Jr.
Antonino T. Aquino
Jaime I. Ayala
Charles H. Cosgrove
Rufino Luis T. Manotok
**
**
**
**
Aurelio R. Montinola III
Arthur R. Tan
Victoria P. Garchitorena
Renato O. Marzan
**
Ramon G. Opulencia
John Philip S. Orbeta
Chairman & Chief Executive Officer
President & Chief Operating Officer
Adviser to the Chairman
Chief Finance Officer (until 31 December 2006)
Senior Managing Director & Corporate Secretary
Senior Managing Director
Senior Managing Director, Corporate Information Officer &
Chief Finance Officer (effective 01 January 2007)
Managing Director
Managing Director, Assistant Corporate Secretary &
Compliance Officer
Managing Director & Treasurer
Managing Director
*Member of the Board of Directors
**Management Committee Member
Gerardo C. Ablaza, Jr., Filipino, 53, has served as a member of the Management Committee of
Ayala Corporation (Ayala Group) since 1998. He also holds the following positions: Senior Managing
Director of Ayala Corporation and President and CEO of Globe Telecom, Inc. He was previously Vice
President and Country Business Manager for the Philippines and Guam of Citibank, N.A. for its
Global Consumer Banking business. Prior to this position he was Vice President of Citibank, N.A.
Singapore for Consumer Banking. Attendant to his last position in Citibank, N.A., Mr. Ablaza was the
bank’s representative to the Board of Directors of CityTrust Banking Corporation and its various
subsidiaries. He graduated Summa Cum Laude at De La Salle University in 1974 with a degree in
AB Major in Mathematics (Honors Program).
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Management
Antonino T. Aquino, Filipino, 59, has served as a member of the Management Committee of Ayala
Corporation (Ayala Group) since August 1998. He also holds the following positions: Managing
Director of Ayala Corporation and President of Manila Water Company, Inc. He also served as
President of Ayala Property Management Corporation, was a Senior Vice President of Ayala Land,
Inc. and a Business Unit Manager in IBM Philippines, Inc. He graduated with Bachelor of Science
Major in Management at Ateneo de Manila University in 1968 and has completed academic units for
the Masteral Degree in Business Management at the Ateneo Graduate School of Business in 1975.
Jaime I. Ayala, Filipino, 44, has served as a member of the Management Committee of Ayala
Corporation (Ayala Group) since 2004. He also holds the following positions: Senior Managing
Director of Ayala Corporation and President and CEO of Ayala Land, Inc. His other significant
positions include: Chairman of the Board of Directors and President of Makati Property Ventures,
Inc.; Chairman of the Board of Directors of Ayala Property Management Corp., Cebu Holdings, Inc.,
Cebu Insular Hotel Co., Inc., Cebu Property Ventures & Dev’t. Corp., Community Innovations, Inc.,
Laguna Properties Holdings, Inc., Laguna Technopark, Inc., Makati Development Corp., and Station
Square East Commercial Corp; Member of the Board of Directors and President of Aurora Properties,
Inc, Ayala Hotels, Inc., Ceci Realty Inc., Enjay Hotels, Inc., Roxas Land Corp. and Vesta Property
Holdings, Inc.; Member of the Board of Directors of Alabang Commercial Corp., Ayala Greenfield
Development Corp., Ayala Infrastructure Ventures, Inc., Ayala Land Sales, Inc., Berkshire Holdings,
Inc., Bonifacio Arts Foundation, Inc., Bonifacio Land Corp., Emerging City Holdings, Inc., Fort
Bonifacio Development Corp., myAyala.com, Inc., Ayala Center Association and Makati Parking
Authority. Prior to joining Ayala Land, he spent 19 years with McKinsey & Company in the US,
Mexico, Tokyo and Hong Kong. At McKinsey, he was a Director (senior partner) and played a
number of global and regional leadership roles, including that of President of McKinsey’s Manila
office. He earned his M.B.A. from Harvard School, graduating with honors in 1988. He completed
his undergraduate work in 1984 at Princeton University, where he graduated Magna Cum Laude in
Economics, with a minor in Engineering.
Charles H. Cosgrove, American, 51, has served as a member of the Management Committee of
Ayala Corporation (Ayala Group) since 1998. He is also a Managing Director of Ayala Corporation
and President of Ayala International Pte Ltd. Prior to joining Ayala Corporation, he was a Managing
Director of Singapore Telecom International Pte Ltd. He graduated from Stanford University with an
AB in 1977. He obtained a JD from Georgetown University School of Law in 1980.
Rufino Luis T. Manotok, Filipino, 56, has served as a member of the Management Committee of
Ayala Corporation (Ayala Group) since 1999. He also holds the following positions: Senior Managing
Director, Corporate Information Officer and Chief Finance Officer of Ayala Corporation; President and
Chairman of the Board of Directors of Honda Cars Makati, Inc., Isuzu Automotive Dealership, Inc.,
Isuzu Cebu, Inc., and Honda Cars Cebu, Inc.; Director of Ayala Aviation Corporation, BPI Family
Savings Bank, Inc., and Michigan Holdings, Inc. He graduated with Bachelor of Arts in Economics at
Ateneo de Manila University in 1971 and had his Masters Degree in Business Management at Asian
Institute of Management in 1973. He also took the Advance Management Program at Harvard
Business School in 1994.
Aurelio R. Montinola III, Filipino, 55, has served as member of the Management Committee of Ayala
Corporation (Ayala Group) since 2005. He also holds the following positions: President and CEO of
Bank of the Philippine Islands; Vice Chairman of the Board of Directors of Republic Cement
Corporation; Vice Chairman of the Board of Trustees of Far Eastern University; Chairman of East
Asia Educational Foundation, Inc.; Chairman of the Board of Directors of Amon Trading Corporation;
Board of Advisers of MasterCard Incorporated; Director of Manila Water Company; Director of the
Bankers Association of the Philippines; President of BPI Foundation, Inc.; Director of Makati Business
Club; and Member of Management Association of the Philippines. He graduated with BS
Management Engineering at Ateneo de Manila University in 1973 and received his MBA at Harvard
Business School in 1977.
Arthur R. Tan, Filipino, 47, has served as a member of the Management Committee of Ayala
107
Management
Corporation (Ayala Group) since 2001. He holds the position of Senior Managing Director of Ayala
Corporation. He is also the President and CEO of Integrated Micro-electronics Inc. (IMI), Chairman
and President of EAZIX Inc. and President & CEO of Speedy-Tech Electronics Ltd. Prior to joining
Ayala Corporation, he was a Managing Director of American Microsystems, Inc. (Asia Pacific
Region/Japan). He graduated with a degree of BS in Electronics and Communication Engineering at
the Mapua Institute of Technology in 1982. He has taken post graduate classes in MSEE from the
University of Idaho and business courses from Harvard University.
Victoria P. Garchitorena, Filipino, 62, has served as Managing Director of Stakeholder Relations of
Ayala Corporation since 1996. Concurrently she is President of Ayala Foundation, Inc. and President
of Ayala Foundation USA. She served as Head, Presidential Management Staff, Secretary to the
Cabinet and Senior Consultant on Poverty Alleviation and Good Governance to the President of the
Philippines. She was Founding Chair, League of Corporate Foundations and Philippine Council on
NGO Certification, Board Member of the Council on Foundations (USA). Currently, she is Senior
Adviser of the Asia Pacific Council Against Corruption – World Bank and Chair of the International
Center for Innovation, Transparency, and Excellence in Governance
Renato O. Marzan, Filipino, 58, has served as the Assistant Corporate Secretary of Ayala
Corporation since 1982. He also holds the following positions: Managing Director and Compliance
Officer of Ayala Corporation; Director and Corporate Secretary of Honda Cars Makati, Inc., Isuzu
Automotive Dealership, Inc. and Michigan Holdings, Inc.; Corporate Secretary of Globe Telecom, Inc.,
Avida Land, Corp. (formerly Laguna Properties Holdings, Inc.), Ayala Systems Technology, Inc.,
Azalea Technology Investment, Inc., Ayala Hotels, Inc., Laguna Technopark, Inc., Integrated Microelectronics, Inc., Community Innovations, Inc., and Roxas Land Corporation; and Assistant Corporate
Secretary of Ayala Corporation, Ayala Land, Inc. and Ayala Foundation, Inc. He had his education at
San Beda College with a degree in Bachelor of Arts in Philosophy (Magna Cum Laude) in 1969 and
Bachelor of Laws (Cum Laude) in 1973.
Ramon G. Opulencia, Filipino, 50, has served as Treasurer of Ayala Corporation since September
2005. Previously, he served as Senior Assistant Treasurer since November 1992. He is also a
Managing Director of Ayala Corporation. He is currently a member of the Board of Directors and the
Audit Committee of BPI Family Savings Bank, Inc. Prior to joining Ayala Corporation, he was a
Senior Manager of Bank of the Philippine Islands’ Treasury Group. He graduated with a BS in
Mechanical Engineering at the De La Salle University in 1978 and took his Master in Business
Management at the Asian Institute of Management graduating (with Distinction) in
1983. He completed the Advanced Management Program at the Harvard Business School in May
2005.
John Philip S. Orbeta, Filipino, 45, has served as Managing Director and Head of Strategic Human
Resources and Organization Development of Ayala Corporation since May 2005. Concurrently, he is
also a Senior Vice President and Head of the Human Resources Group of Ayala Land, Inc. and
Chairman of the Ayala Group Human Resources Council. Prior to joining Ayala Corporation, he
spent 19 years at Watson Wyatt Worldwide (NYSE:WW), global management consulting firm where
he was the Vice President and Global Practice Director for the firm's Human Capital Group,
overseeing the firm's practices in executive compensation, strategic rewards, data services and
organization effectiveness around the world. He was also a member of Watson Wyatt's Board of
Directors. He received his undergraduate degree in Economics from the Ateneo de Manila University
where he also attended graduate studies in Industrial Psychology. He completed a Leadership
Development Program at the Harvard Business School.
Solomon M. Hermosura, Filipino, 45, has served as Managing Director of Ayala Corporation since
1996. He also holds the following positions: Director of Pameka Holdings, Inc., Water Capital Works,
Inc. and West Zone Water Service, Inc.; Director and Corporate Secretary of Philwater Holdings
Company, Inc. and Northern Waterworks and Rivers of Cebu, Inc.; Corporate Secretary of Manila
Water Company, Inc.; and Assistant Corporate Secretary of Ayala DBS Holdings, Inc. He earned his
108
Management
Bachelor of Laws degree from San Beda College in 1986 and the placed third in the 1986 Bar
Examination.
Ricardo Nicanor N. Jacinto, Filipino, 46, has served as Managing Director of Ayala Corporation
since 2000. He also holds the following positions: Director of Ayala Automotive Holdings Corporation,
Ayala Hotels, Inc., Globalstride Holdings, Ltd., Technopark Land, Inc., PFC Properties, Inc., PFN
Holdings Corp., Ayala Aviation Corp., Michigan Holdings, Inc., Integreon Holdings, Integreon
Philippines, Integreon India, and LiveIt Philippines; Director and President of Globalstride Marketing
Corporation; and President of Nicanor P. Jacinto, Jr. Foundation. He earned his Masteral in Business
Administration at Harvard University in 1986.
Rufino F. Melo III, Filipino, 54, has served as Managing Director of Ayala Corporation since 2006. He
is also a Director of Darong Agricultural Corp. and Pameka Holdings, Inc. Previously, he served as
Associate Director of Ayala Corporation from 1998 to 2005. Prior to joining Ayala Corporation, he
was the Group Financial Comptroller of Jardine Davies, Inc. He graduated with a BSBA in Accounting
at the University of the East in 1975.
Luis Juan B. Oreta, Filipino, 51, has served as Managing Director of Ayala Corporation since 2002.
He is also a Director of Technopark Land, Inc. and Michigan Holdings, Inc. He graduated with a BS
in Business Economics at the University of the Philippines in 1977 and took his Master in Business
Administration at Rutgers University in 1982.
SIGNIFICANT EMPLOYEES
No single person or employee is expected to make a significant contribution to the business since
Ayala considers the collective efforts of all its employees as instrumental to the success of Ayala’s
performance.
FAMILY RELATIONSHIP
Ayala’s Chairman Emeritus, Jaime Zobel de Ayala, is the father of Jaime Augusto Zobel De Ayala
(Chairman of the Board and CEO) and Fernando Zobel de Ayala (President and COO).
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
As of 30 September 2007, to the best of Ayala's knowledge, there has been no occurrence of any of
the following events since its incorporation which are material to an evaluation of the ability or
integrity of any director, person nominated to become a director, executive officer, or control person
of Ayala:
(a) Any insolvency or bankruptcy petition filed by or against any business of which such person was
a general partner or executive officer either at the time of the insolvency or within two years prior
to that time;
(b) Any conviction by final judgment in a criminal proceeding, domestic or foreign, or any pending
criminal proceeding, domestic or foreign, excluding traffic violations and other minor offenses;
(c) Any final and executory order, judgment, or decree of any court of competent jurisdiction,
domestic or foreign, permanently or temporarily enjoining, barring, suspending, or otherwise
limiting involvement in any type of business, securities, commodities, or banking activities; and
(d) Any final and executory judgment by a domestic or foreign court of competent jurisdiction (in a
civil action), the SEC, or comparable foreign body, or a domestic or foreign exchange or
109
Management
electronic marketplace or self-regulatory organization, for violation of a securities or commodities
law.
COMPENSATION OF DIRECTORS AND OFFICERS
Directors
Article IV, Section 21 of Ayala’s By-Laws provides:
“Section 21 - The members of the Board of Directors of the Corporation who are neither officers nor
consultants of the Corporation shall be entitled to a director’s fee in an amount to be fixed by the
stockholders at a regular or special meeting duly called for the purpose.”
During the Annual Stockholders’ Meeting held on April 4, 2003, the stockholders ratified the
resolution fixing the remuneration of non-executive directors at P1,000,000.00 per year, consisting of
the following components:
Retainer Fee:
Per diem per Board meeting attended:
P500,000.00
P100,000.00
In addition, a non-executive Director is entitled to a per diem of P20,000.00 per Board committee
meeting actually attended.
Officers
Name and Principal Position
1
Year
Salary
Chairman and CEO
President and COO
Aristón Estrada, Jr.
Delfin L. Lazaro
Senior Managing Director and
CFO
Senior Managing Director and
Corporate Secretary
Managing Director and
Corporate Information Officer
Ramon G. Opulencia
Treasurer
Renato O. Marzan
Compliance Officer
Alfredo I. Ayala
Managing Director
110
Other Variable Pay
Management
Name and Principal Position
1
Year
Salary
Other Variable Pay
Managing Director
Solomon M. Hermosura
Managing Director
Ricardo N. Jacinto
Managing Director
Mark Anthony N. Javier
Managing Director
Jose Teodoro K. Limcaoco*
Managing Director
Ramon F.R. Medina**
Managing Director
Rufino F. Melo III
Managing Director
Managing Director
Luis Juan B. Oreta
Managing Director
CEO and 16 Most Highly
Compensated Executive
Officers
2005
P153.55 million
P110.68 million
2006
P172.07 million
P258.71 million
Projected 2007
P189.28 million
P44.28 million
*Transferred to a subsidiary effective January 1, 2007
**Retired December 31, 2005
Name
Salary
Other Variable Pay
2005
P231.15 million
P256.11 million
2006
P251.85 million
P398.05 million
Projected 2007
P277.04 million
P 64.95 million
All Officers as a Group
The total annual compensation includes basic pay and other taxable income or bonuses.
Ayala has no other arrangement with regard to the remuneration of its existing Directors and officers
aside from the compensation received as herein stated.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-INCONTROL ARRANGEMENTS
Pursuant to Ayala’s By-Laws, each Director has a term of office of one year from date of election or
until his successor shall have been named, qualified, and elected. Each Executive Officer has an
employment contract with Ayala for an indefinite period, the terms and conditions of which are in
accordance with existing laws.
111
Management
The executive officers are entitled to receive retirement benefits in accordance with the terms and
conditions of Ayala’s Bureau of Internal Revenue (“BIR”)-registered employees’ retirement plan.
There is no plan or arrangement by which the Executive Officers will receive from Ayala any form of
compensation in case of a change-in-control of Ayala or a change in the officers’ responsibilities
following such change-in-control.
WARRANTS AND OPTIONS OUTSTANDING: REPRICING
The Company has offered the Executive Stock Option Plan (ESOP) to the Company’s officers since
1995 and the Executive Stock Ownership Plan (ESOWN) since 2005.
The ESOP Plan has a 10-year option period which vests as follows: 40% on the first anniversary,
30% on the second anniversary and the remaining 30% vests on the third anniversary. Of the above
named officers, there were 42,347 common shares exercised from January to September 2007 and
363,388 common shares as options outstanding as of September 2007 under the ESOP Plans,, to
wit:
Name
Delfin L. Lazaro
Ramon G. Opulencia
Renato O. Marzan
Jose Teodoro K.
Limcaoco**
Rufino F. Melo III
All above-named Officers
as a group
Shares
Exercised
Options
Outstanding
42,347
Date of
Grant
Exercise
Price
Market Price at
Date of Grant
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
165.93*
215.83*
363,388
*Average prices on the dates of grant
** Transferred to a subsidiary effective January 1, 2007
Moreover, subscriptions on the ESOWN Plans should be paid within the 10-year period from date of
grant and the holding period expires as follows: 40% on the first anniversary, 30% on the second
anniversary and the remaining 30% on the third anniversary. Of the above-named officers, there
were 54,504 and 469,956 common shares that were fully paid and remain outstanding, respectively,
as of September 2007 under the ESOWN Plans, to wit:
Name
Fully-paid
Shares
Outstanding
Shares
Delfin L. Lazaro
Ramon G. Opulencia
Renato O. Marzan
Jose Teodoro K.
Limcaoco**
112
Date of
Grant
Subscription
Price
Market Price at
Date of Grant
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Various
Management
Rufino F. Melo III
All above-named Officers
as a group
Various
54,504
469,956
Various
Various
294.78*
352.50*
*Average prices on the dates of grant
** Transferred to a subsidiary effective January 1, 2007
The Company has adjusted the exercise price and market price of the options awarded to the above
named officers due to the stock dividend declared by the Company in May 2004 and June 2007, and
the reverse stock split in May 2005.
MANAGEMENT AND CERTAIN SECURITY HOLDERS
Security Ownership of Certain Record and Beneficial Owners and Management
Security Ownership of Certain Record and Beneficial Owners (of more than 5%) as of September 30,
2007
Type of
Class
Name, address of
Record Owner and
Relationship with Issuer
Common
Mermac, Inc.
35/F Tower One, Ayala
Triangle, Ayala Ave.,
Makati City
Common
PCD Nominee Corporation HSBC and Standard
3
4
(Non-Filipino)
Chartered Bank (SCB)
G/F MSE Bldg. Ayala
Ave., Makati City
Common
14/F L.V. Locsin Bldg.
6752 Ayala Ave., Makati
City
1
5
Name of Beneficial
Owner and
Relationship with
Record Owner
2
Mermac, Inc.
6
Citizenship
No. of Shares
Held
Filipino
210,895,275
Percent of
the
Outstanding
Common
Shares
50.95%
Various
116,299,266
28.10%
Japanese
43,803,848
10.58%
Security Ownership of Directors and Management as of September 30, 2007
Title of Class
Name of Beneficial Owner
Amount and Nature of
Beneficial Ownership
Citizenship
Percent of
All Classes
Directors
Common
Common
Common
Common
Common
Meneleo J. Carlos, Jr.
Toshifumi Inami
Delfin L. Lazaro
Common
Xavier P. Loinaz
241,461
241,440
1
1
91,511
87,928
1
(direct)
(direct )
(direct)
(direct)
(direct &
indirect)
(direct)
Filipino
Filipino
Filipino
Japanese
Filipino
0.051166%
0.051162%
0.000000%
0.000000%
0.019392%
Filipino
0.018632%
The Co-Vice Chairmen of Mermac, Inc., Jaime Augusto Zobel de Ayala and Fernando Zobel de Ayala, are the
Chairman/CEO and President/COO of the Company, respectively.
The Board of Directors of Mermac, Inc. has the power to decide how Mermac shares in AC are to be voted.
3
The PCD is not related to the Company.
4
HSBC and SCB are participants of PCD. The 69,670,230 and 28,553,877 shares beneficially owned by HSBC and SCB,
respectively, form part of the 116,299,266 shares registered in the name of PCD Non-Filipino and Filipino. The clients of
HSBC and SCB have the power to decide how their shares are to be voted.
5
Mitsubishi Corporation is not related to the Company.
6
The Board of Directors of Mitsubishi Corporation has the power to decide how Mitsubishi shares in AC are to be voted.
2
113
Management
Title of Class
Name of Beneficial Owner
Amount and Nature of
Beneficial Ownership
Citizenship
Percent of
All Classes
Directors
Common
241,461
Common
114,090
CEO and Most Highly Compensated Executive Officers
Common
Common
Common
Delfin L. Lazaro
241,461
241,440
91,511
Common
Common
114,090
89,334
Preferred “B”
Common
Ramon G. Opulencia
25,000
63,806
Preferred “B”
Common
Common
Common
Common
Renato O. Marzan
Alfredo I. Ayala
15,000
57,641
0
68,742
49,252
Ricardo N. Jacinto
23,859
Common
Preferred “B”
Common
Rufino F. Melo III
47,982
38,009
Common
Common
Luis Juan B. Oreta
29,743
36,558
Common
Gerardo C. Ablaza
50,256
Common
Antonino T. Aquino
All Directors and Officers as a group
29,396
1,401,010
(direct)
(direct)
Filipino
Filipino
0.051166%
0.024176%
(direct)
(direct)
(direct &
indirect)
(direct)
(direct &
indirect)
(direct)
(direct &
indirect)
(direct)
(direct)
Filipino
Filipino
Filipino
0.051166%
0.051162%
0.019392%
Filipino
0.024176%
0.018930%
(direct)
(direct &
indirect)
(direct &
indirect)
(direct)
(direct &
indirect)
(direct)
(direct &
indirect)
(direct &
indirect)
(direct)
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
Filipino
0.005298%
0.013521%
0.003179%
0.012214%
n/a
0.014567%
0.010437%
0.005056%
Filipino
0.010168%
0.008054%
Filipino
Filipino
0.006303%
0.007747%
Filipino
0.012142%
Filipino
0.007102%
0.280000%
None of the members of Ayala’s directors and management owns 2% or more of Ayala’s outstanding
capital stock.
VOTING TRUST HOLDERS OF 5% OR MORE
Ayala knows of no person holding more than 5% of common shares under a voting trust or similar
agreement.
114
MATTERS AFFECTING LIQUIDITY AND CAPITAL EXPENDITURE
As regards internal and external sources of liquidity, funding will be sourced from internally generated
cash flows, and also from borrowings or available credit facilities from other local and international
commercial banks, including an affiliated bank.
There is no material commitment for capital expenditures other than those performed in the ordinary
course of trade or business.
There is no significant element of income not arising from continuing operations.
There have not been any seasonal aspects that had a material effect on the financial condition or
results of Ayala’s operations.
115
NAMED EXPERTS AND COUNSEL
The Company’s auditor is SyCip Gorres Velayo & Co. (“SGV & Co.”), independent public accountants
and a member of Ernst & Young. SGV & Co. audited the Company’s consolidated accounts, financial
statements and schedules, subject to the qualifications noted in their report, in accordance with
Philippine Financial Reporting Standards for the financial periods ended December 31, 2005 and
2006, included in this Prospectus.
In 2006, Ayala paid SGV & Co. audit and audit-related fees of approximately P2.75 million and other
fees amounting to approximately P4.61 million. In 2005, Ayala paid SGV & Co. audit and audit-related
fees of approximately P2.28 million and other fees amounting to approximately P2.01 million.
In 2006, Ayala was billed for services rendered by SGV & Co. for an aggregate fee of P4.61M for the
agreed-upon procedures for the primary offer of Preferred B shares, business process review and
business continuity plan development. In 2005, Ayala also engaged and paid SGV & Co. for an
aggregate fee of P2.01M to render services relating to the Company’s IFRS training, business
process review and business continuity plan development.
Ayala has not secured consulting services from SGV & Co. for tax fees for the last two (2) fiscal
years.
The Company’s Audit Committee recommended the appointment of SGV & Co. as the Company’s
external auditor and its engagement for the other services described above to the Ayala Board. The
Board approved the recommendation. Ayala’s stockholders subsequently ratified the Board’s
approval.
SGV & Co. has no shareholdings in the Company nor any right, whether legally enforceable or not, to
nominate persons or to subscribe for the securities in the Company. SGV & Co. will not receive any
direct or indirect interest in the Company or in any securities thereof (including options, warrants or
rights thereto) pursuant to or in connection with the Offer. The foregoing is in accordance with the
Code of Ethics for the Professional Accountants in the Philippines (which is based on the
International Code of Ethics for Professional Accountants developed by the International Federation
of Accountants) set by the Board of Accountancy and approved by the Professional Regulation
Commission.
Romulo Mabanta Buenaventura Sayoc & De Los Angeles passed upon certain Philippine legal
matters in respect of the Offer for the Joint Lead Underwriters and Bookrunners.
Neither SGV & Co. nor Romulo Mabanta Buenaventura Sayoc & De Los Angeles has any direct or
indirect interest in the Company arising from the Offer.
CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with any accountant on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, nor was there any
resignation or dismissal of any accountant who was previously engaged as the principal accountant
to audit Ayala’s financial statements, or an independent accountant who was previously engaged to
audit a significant subsidiary and on whom the principal accountant expressed reliance in its report.
116
Named Experts and Counsel
The consolidated financial statements of Ayala Corporation and Subsidiaries have been prepared in
conformity with accounting principles generally accepted in the Philippines using the historical cost
basis except for financial assets at fair value through profit or loss, available-for-sale financial assets
and derivative instruments which have been measured at fair value. Accounting principles and
policies applied for the period ending June 30, 2007 are the same as those applied in the preceding
calendar year.
There was no new accounting standard adopted in the first half of 2007 but the Company will adopt
the following amendments within the year:
- PFRS 7, Financial Instruments: Disclosures, which introduces new disclosures to improve the
information about financial instruments. It requires the disclosure of qualitative information about
exposure to risks arising from financial instruments, including minimal disclosures about credit risk,
liquidity risk, and market risk.
- PAS 1, Presentation of Financial Statements, requires the Group to make new disclosures to enable
the users of the financial statements to evaluate the Group’s objectives, policies and processes for
managing capital.
- IFRIC 10, Interim Financial Reporting and Impairment, which requires nonreversal of impairment
loss recognized in a previous interim period in respect of goodwill or an investment in either an equity
instrument or financial asset carried at cost.
The Company believes that these interpretations will not have a significant impact on the
consolidated financial statements of the Group when the interpretations are adopted in 2007.
117
TAXATION
The following is a discussion of the material Philippine tax consequences of beneficial ownership of the Bonds to
a holder who purchases Bonds in the initial offering. This discussion is based upon laws, regulations, rulings,
income tax conventions (treaties), administrative practices and judicial decisions in effect at the date of this
Prospectus. Subsequent legislative, judicial, or administrative changes or interpretations may be retroactive and
could affect the tax consequences to Bondholders.
The tax treatment of a Bondholder may vary depending upon such Bondholder’s particular situation, and certain
Bondholders may be subject to special rules not discussed below. United States Federal, State, and other
foreign (other than Philippine) tax consequences of the ownership and disposition of the Bonds are not
discussed below. This summary does not purport to address all tax aspects that may be important to a
Bondholder.
BONDHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF A BOND,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY LOCAL OR FOREIGN TAX LAWS.
TAXATION
As used in this section, the term “resident alien” refers to an individual whose residence is within the
Philippines and who is not a citizen thereof, a “non-resident alien” is an individual whose residence is
not within the Philippines and who is not a citizen of the Philippines; a non-resident alien who is
actually within the Philippines for an aggregate period of more than 180 days during any calendar
year is considered a “non-resident alien doing business in the Philippines”; otherwise, such nonresident alien who is actually within the Philippines for an aggregate period of 180 days or less during
any calendar year is considered a “non-resident alien not doing business in the Philippines.” A
“resident foreign corporation” is a foreign corporation engaged in trade or business within the
Philippines; and a “non-resident foreign corporation” is a non-Philippine corporation not engaged in
trade or business within the Philippines.
TAXATION OF INTEREST
Interest income on the Bonds received by individuals who are Philippine residents as well as
domestic and resident foreign corporations shall be subject to a final withholding tax of 20% or such
rate as may be provided by law or regulation, which shall be withheld at the source. Interest income
received by non-resident foreign individuals engaged in trade or business in the Philippines shall be
subject to a final withholding tax of 20% while non-resident foreign individuals not engaged in trade or
business in the Philippines shall be subject to a final withholding tax of 25%. Interest income
received by non-resident foreign corporations shall be subject to a final withholding tax of 32%. The
tax shall be for the account of the Bondholder. The foregoing rates are subject to further reduction by
any applicable tax treaty.
Tax-exempt Status
Bondholders who are exempt from withholding tax on interest income or subject to a preferential
withholding tax rate may claim such exemption or preferential rate by submitting the necessary
documents. Said Bondholder shall submit the following requirements to the Registrar, or to the Joint
Lead Underwriters and Bookrunners (together with their completed Application to Purchase) who
shall then forward the same to the Registrar: (i) certified true copy of the tax exemption certificate
ruling or opinion issued by the Bureau of Internal Revenue confirming the exemption or preferential
rate; (ii) a duly notarized undertaking, in prescribed form, declaring and warranting its tax-exempt
status or preferential rate entitlement, undertaking to immediately notify the Issuer of any suspension
or revocation of the tax exemption certificate or preferential rate entitlement and agreeing to
118
Taxation
indemnify and hold the Issuer free and harmless against any claims, actions, suits, and liabilities
resulting from the non-withholding of the required tax; and (iii) such other documentary requirements
as may be required under the applicable regulations of the relevant taxing or other authorities which
for purposes of claiming tax treaty withholding rate benefits shall include evidence of the applicability
of a tax treaty, consularized proof of the Bondholder’s legal domicile in the relevant treaty state, and
confirmation acceptable to the Issuer that the Bondholder is not doing business in the Philippines;
provided further, that all sums payable by the Issuer to tax-exempt entities shall be paid in full without
deductions for Taxes, duties, assessments, or government charges, subject to the submission by the
Bondholder claiming the benefit of any exemption or reasonable evidence of such exemption to the
Registrar.
Bondholders may sell their Bonds any time to persons of similar tax status (i.e. tax-exempt to taxexempt, taxable to taxable); otherwise, such Bondholder may sell only on a Coupon Payment Date.
A selling or purchasing Bondholder claiming tax-exempt status is required to submit the following
documents to the Issuer, within three (3) days from settlement date: a written notification of the sale
or purchase, including the tax status of the selling or buying party, and (ii) an indemnity agreement
wherein the new Bondholder undertakes to indemnify the Issuer for any tax or change that may later
on be assessed from the Issuer on account of such transfer.
VALUE-ADDED TAX
Gross income arising from the sale of the Bonds in the Philippines by Philippine-registered dealers in
securities will be subject to a 12% value-added tax.
GROSS RECEIPTS TAX
Bank and non-bank financial intermediaries are subject to gross receipts tax on gross receipts
derived from sources within the Philippines in accordance with the following schedule:
On interest, commissions and discounts from lending activities as well as income from financial
leasing, on the basis of remaining maturities of instruments from which such receipts are derived:
Maturity period is five (5) years or less
Maturity period is more than five (5) years
5%
1%
Net trading gains realized within the taxable year on the sale or disposition of the Notes shall be
taxed at 7%.
Provided, however, that in case the maturity period referred above is shortened through pretermination, then the maturity period shall be reckoned to end as of the date of pre-termination for
purposes of classifying the transaction and the correct rate shall be applied accordingly.
DOCUMENTARY STAMP TAXES
A documentary stamp tax is imposed upon the issuance of debentures and certificates of
indebtedness issued by Philippine companies, such as the Bonds, at the rate of P1.00 on each P200,
or fractional part thereof, of the issue price of such debt instruments; provided, that for debt
instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be
of a proportional amount in accordance with the ratio of its term in number of days to three hundred
sixty five (365) days.
The documentary stamp tax is collectible wherever the document is made, signed, issued, accepted,
or transferred, when the obligation or right arises from Philippine sources, or the property is situated
in the Philippines. Any applicable documentary stamp taxes on the original issue will be paid by the
Issuer for its own account.
119
Taxation
TAXES ON SALE OR DISPOSITION OF THE BONDS
A Bondholder will recognize a gain or loss upon the sale or other disposition (including a redemption
at maturity) of the Bonds in an amount equal to the difference between the amount realized from such
disposition, and such Bondholder’s basis in the Bonds. Such gain or loss is likely to be deemed a
capital gain or loss assuming that the Bondholder has held the Bonds as capital assets. Generally,
any gains derived from the sale or personal property (including the Bonds) effected outside in the
Philippines shall be treated as having been derived from sources within the country in which such
property is sold. Under current law, capital gains tax arising from the transfer of the Bonds, if any,
shall be for the account of the Bondholder. Under current law, the net gains realized upon a sale of
the Bonds by resident citizens are subject to income tax at graduated rates of 5% to 32%, while those
realized by domestic corporations are subject to income tax of 32%.
No documentary stamp tax is due on the secondary trading of the Bonds.
ESTATE OR GIFT TAXES
The transfer of a Bond by way of succession upon the death of a Bondholder will be subject to
Philippine estate tax at progressive rates ranging from 5% to 20% if the net estate of the Bondholder
is over P200,000.
The transfer of a Bond by gift to an individual who is related to the Bondholder will generally be
subject to a Philippine donor’s tax at progressive rates ranging from 2% to 15% if the net gifts made
by the Bondholder during the relevant calendar year exceed P100,000. Gifts to unrelated donees are
generally subject to tax at a flat rate of 30%. An unrelated donee is a person who is not: (i) a brother,
sister, (whether by whole or half blood), spouse, ancestor, and lineal descendant, or (ii) relative by
consanguinity in the collateral line within the fourth degree of relationship to the Bondholder.
The foregoing applies without regard to whether the Bondholder is a non-resident. However, the
Philippines will not collect estate and donor’s taxes on the transfer of the Bonds by gift or succession
if the deceased, at the time of death, or the donor at the time of donation, was a citizen and resident
of a foreign country that provides certain reciprocal rights to citizens of the Philippines (a
“Reciprocating Jurisdiction”). For these purposes, a Reciprocating Jurisdiction is a foreign country
which at the time of death or donation: (i) did not impose a transfer tax of any character in respect of
intangible personal property of citizens of the Philippines not residing in that foreign country, or (ii)
allowed a similar exemption from transfer or death taxes of every character or description in respect
of intangible personal property owned by citizens of the Philippines not residing in that foreign
country.
120
FINANCIAL INFORMATION
The following pages set forth Ayala Corporation’s audited consolidated financial statements for the
years ended December 31, 2006, 2005 and 2004 and unaudited consolidated financial statements as
of September 30, 2007.
121
SGV & CO
SyCip Gorres Velayo & Co.
Phone: (632) 891-0307
Fax:
(632) 819-0872
www.sgv.com.ph
6760 Ayala Avenue
1226 Makati City
Philippines
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-FR-1
INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of Directors
Ayala Corporation
Tower One, Ayala Triangle
Ayala Avenue, Makati City
We have audited the accompanying consolidated financial statements of Ayala Corporation and
Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2006 and 2005, and
the consolidated statements of income, consolidated statements of changes in equity and consolidated
statements of cash flows for each of the three years in the period ended December 31, 2006, and a
summary of significant accounting policies and other explanatory notes. The financial statements of
the Bank of the Philippine Islands and subsidiaries, in which the Company has 33.9% interest in 2006
and 35.9% interest in 2005, were audited by other auditors whose report has been furnished to us, and
our opinion on the consolidated financial statements, insofar as it relates to the amounts included for
the Bank of the Philippine Islands and subsidiaries, is based solely on the report of the other auditors.
In the consolidated financial statements, the Company’s investment in the Bank of the Philippine
Islands and subsidiaries is stated at P
=29,860 million and P
=29,190 million as of December 31, 2006 and
2005, respectively, and the Company’s equity in the net income of the Bank of the Philippine Islands
and subsidiaries is stated at P
=3,300 million in 2006, P
=3,026 million in 2005 and P
=2,363 million in
2004.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with Philippine Financial Reporting Standards. This responsibility includes:
designing, implementing and maintaining internal control relevant to the preparation and fair
presentation of consolidated financial statements that are free from material misstatement, whether
due to fraud or error; selecting and applying appropriate accounting policies; and making accounting
estimates that are reasonable in the circumstances.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance whether the financial statements are free from material misstatement.
SGV & Co is a member practice of Ernst & Young Global
*SGVMC108983*
-2-
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the entity's
preparation and fair presentation of the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained and the report of other auditors are sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, based on our audits and the report of the other auditors, the consolidated financial
statements present fairly, in all material respects, the financial position of Ayala Corporation and
Subsidiaries as of December 31, 2006 and 2005, and their financial performance and their cash flows
for each of the three years in the period ended December 31, 2006 in accordance with Philippine
Financial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Jessie D. Cabaluna
Partner
CPA Certificate No. 36317
SEC Accreditation No. 0069-AR-1
Tax Identification No. 102-082-365
PTR No. 0266532, January 2, 2007, Makati City
February 21, 2007
*SGVMC108983*
AYALA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands)
December 31
2005
(As Restated Note 2)
2006
ASSETS
Current Assets
Cash and cash equivalents (Notes 4 and 28)
Accounts and notes receivable - net (Notes 5, 27 and 28)
Inventories (Notes 6 and 15)
Other current assets (Note 7)
Total Current Assets
Noncurrent assets held for sale (Note 13)
Noncurrent Assets
Noncurrent accounts and notes receivable (Notes 5 and 28)
Land and improvements (Note 15)
Investments in associates and joint ventures - net (Note 8)
Investment in bonds and other securities (Notes 9 and 28)
Investment properties - net (Notes 10 and 15)
Property, plant and equipment - net (Notes 11, 15 and 26)
Deferred tax assets - net (Note 21)
Pension assets (Note 23)
Intangible assets - net (Notes 12 and 20)
Other noncurrent assets
Total Noncurrent Assets
Total Assets
P
=23,118,432
17,469,560
9,803,922
3,961,315
54,353,229
3,658,484
58,011,713
P
=24,010,827
11,308,085
8,998,906
2,190,269
46,508,087
–
46,508,087
2,519,816
16,174,984
68,568,683
3,462,435
16,794,662
9,057,075
1,123,912
202,598
4,630,652
1,785,374
124,320,191
P
=182,331,904
5,631,132
16,604,460
63,807,710
2,072,967
17,011,839
9,917,554
1,113,407
236,349
2,996,221
1,946,541
121,338,180
P
=167,846,267
P
=18,325,716
2,504,007
295,846
P
=17,311,245
6,154,405
273,218
9,359,594
–
1,453,013
31,938,176
2,985,240
2,230,000
985,626
29,939,734
469,100
32,407,276
–
29,939,734
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses (Notes 14, 27 and 28)
Short-term debt (Notes 15 and 28)
Income tax payable
Current portion of:
Long-term debt (Notes 15 and 28)
Cumulative redeemable preferred shares (Notes 17 and 28)
Other current liabilities
Total Current Liabilities
Liabilities directly associated with noncurrent assets
held for sale (Note 13)
(Forward)
*SGVMC108983*
-2-
December 31
2005
(As Restated Note 2)
2006
Noncurrent Liabilities
Long-term debt - net of current portion (Notes 15 and 28)
Cumulative redeemable preferred shares - net of current portion
(Notes 17 and 28)
Deferred tax liabilities - net (Note 21)
Pension liabilities (Note 23)
Other noncurrent liabilities (Note 16)
Total Noncurrent Liabilities
Total Liabilities
Equity
Equity attributable to equity holders of Ayala Corporation
Paid-up capital (Note 18)
Share-based payments (Note 24)
Cumulative translation adjustment
Retained earnings (Note 18)
Net unrealized gain on available-for-sale financial assets
Treasury stock (Note 18)
Minority interests
Minority interests - net of interest attributable to
noncurrent assets held for sale
Minority interests attributable to noncurrent assets
held for sale
Total Equity
Total Liabilities and Equity
P
=38,517,839
P
=46,507,287
2,500,000
443,736
487,726
6,141,065
48,090,366
80,497,642
2,500,000
311,891
433,584
5,370,385
55,123,147
85,062,881
23,137,948
558,416
(298,310)
51,659,261
2,078,522
(310)
77,135,527
16,959,696
655,754
587,350
42,513,384
477,839
(310)
61,193,713
23,568,083
21,589,673
1,130,652
24,698,735
101,834,262
P
=182,331,904
–
21,589,673
82,783,386
P
=167,846,267
See accompanying Notes to Consolidated Financial Statements.
*SGVMC108983*
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in Thousands, Except Earnings Per Share)
Years Ended December 31
2004
2005
(As Re-presented (As Re-presented
- Note 2)
- Note 2)
2006
REVENUE
Sales and services (Notes 10 and 27)
Equity in net income of associates and joint ventures
(Note 8)
Interest, fees, rental, investment and other income (Note 26)
COSTS AND EXPENSES
Costs of sales and services (Notes 10, 19 and 27)
General and administrative (Notes 19, 23, 24 and 27)
Interest and other charges (Notes 6, 15 and 19)
INCOME BEFORE INCOME TAX
PROVISION FOR INCOME TAX (Note 21)
Current
Deferred
P
= 53,394,230
=34,638,421
P
=
P29,973,488
8,252,898
8,518,867
70,165,995
8,202,301
7,702,113
50,542,835
7,622,735
6,126,765
43,722,988
40,857,337
7,708,161
5,410,971
53,976,469
26,170,055
6,011,324
7,562,733
39,744,112
22,157,410
5,071,417
6,594,835
33,823,662
16,189,526
10,798,723
9,899,326
1,764,984
112,175
1,877,159
1,696,400
(857,122)
839,278
1,183,233
211,249
1,394,482
INCOME BEFORE INCOME ASSOCIATED WITH
NONCURRENT ASSETS HELD FOR SALE
14,312,367
9,959,445
8,504,844
INCOME ASSOCIATED WITH NONCURRENT
ASSETS HELD FOR SALE - net of tax (Note 13)
155,258
130,679
100,562
P
= 14,467,625
=10,090,124
P
=
P8,605,406
P
= 12,176,771
2,290,854
P
= 14,467,625
=8,198,004
P
1,892,120
=10,090,124
P
=
P7,353,022
1,252,384
=
P8,605,406
P
=34.44
=23.76
P
=
P21.35
34.58
23.87
21.44
34.28
23.66
21.25
34.41
23.78
21.33
NET INCOME
Net Income Attributable to:
Equity holders of Ayala Corporation
Minority interests
EARNINGS PER SHARE (Note 22)
Basic
Income before income associated with noncurrent
assets held for sale attributable to equity holders
of Ayala Corporation
Net income attributable to equity holders of
Ayala Corporation
Diluted
Income before income associated with noncurrent
assets held for sale attributable to equity holders
Net income attributable to equity holders of
Ayala Corporation
*SGVMC108983*
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Paid-up Capital
(Note 18)
At January 1, 2006
Adjustments to foreign currency
translation
Changes in fair value of available-forsale financial assets
Transferred to profit and loss
Net income recognized directly in equity
Net income for the year
Total income for the year
Issuance of shares
Collections of subscriptions receivable
Cost of share-based payments
of investees
Cash dividends
Increase in minority interests
Dividends paid to minority interests
At December 31, 2006
Share-based
Payments
(Note 24)
=16,959,696
P
=655,754
P
–
–
–
–
–
–
–
6,084,791
93,461
–
–
–
–
–
P
=23,137,948
–
–
–
–
–
(227,101)
–
137,427
(7,664)
–
–
–
P
=558,416
Cumulative
Translation
Retained
Adjustments
Earnings
(Note 18)
(Note 18)
For the year ended December 31, 2006
=587,350
P
Net Unrealized
Gain on
Available-forSale Financial
Assets
(Note 18)
Treasury Stock
(Note 18)
Minority
Interests
Total
Equity
=21,589,673
P
=82,783,386
P
=42,513,384
P
=477,839
P
(P
=310)
(885,660)
–
–
–
(146,104)
(1,031,764)
–
–
(885,660)
–
(885,660)
–
–
–
–
–
12,176,771
12,176,771
–
–
–
–
–
–
–
–
–
(24,199)
–
(170,303)
2,290,854
2,120,551
–
–
2,463,364
(886,880)
544,720
14,467,625
15,012,345
5,857,690
93,461
–
–
–
–
–
(P
=298,310)
–
–
(3,030,894)
–
–
P
=51,659,261
2,487,563
(886,880)
1,600,683
–
1,600,683
–
–
–
–
–
–
–
–
P
=2,078,522
–
–
–
–
(P
=310)
–
–
–
1,879,066
(890,555)
P
=24,698,735
137,427
(7,664)
(3,030,894)
1,879,066
(890,555)
P
=101,834,262
*SGVMC108983*
-2-
Paid-up Capital
(Note 18)
At January 1, 2005
Effect of adoption of Philippine
Accounting Standards No. 39
(Note 2)
translation
Changes in fair value of available-forsale financial assets
Transferred to profit and loss
Net loss recognized directly in equity
Net income for the year
Issuance of shares
Additions to subscriptions receivable
of investees
Acquisition of treasury stock
Cash dividends
Share-based
Payments
(Note 24)
Cumulative
Translation
Retained
Adjustments
Earnings
(Note 18)
(Note 18)
Net Unrealized
Gain on
Assets
(Note 18)
Treasury Stock
(Note 18)
Minority
Interests
Total
Equity
(P
=102)
=19,573,768
P
=72,693,406
P
=16,896,319
P
=397,252
P
=1,160,982
P
=34,665,187
P
=–
P
–
–
–
1,026,230
361,207
–
(59,054)
–
–
(573,632)
–
–
–
(67,674)
(641,306)
–
–
(573,632)
–
(573,632)
–
–
–
–
–
8,198,004
8,198,004
–
–
–
–
–
–
–
–
–
28,740
–
(38,934)
1,892,120
1,853,186
–
–
167,424
(22,052)
(495,934)
10,090,124
9,594,190
57,638
(32,438)
–
–
–
–
–
95,815
(32,438)
–
–
–
–
–
(38,177)
–
–
142,950
–
–
–
–
–
–
=
P16,959,696
153,729
–
–
–
–
=655,754
P
–
–
–
–
–
=587,350
P
–
–
–
(1,376,037)
–
–
=42,513,384
P
138,684
(22,052)
116,632
–
116,632
–
–
–
–
–
–
–
–
=477,839
P
–
–
(208)
–
–
–
(P
=310)
–
–
–
–
1,551,707
(1,329,934)
=21,589,673
P
1,328,383
142,950
153,729
(208)
(1,376,037)
1,551,707
(1,329,934)
=82,783,386
P
*SGVMC108983*
-3-
Paid-up Capital
(Note 18)
At January 1, 2004
translation
Net loss directly recognized in equity
Net income for the year, as restated
Issuance of shares
Collections of subscriptions receivable
Acquisition of treasury stock
Cash dividends
Stock dividends
of investees
=13,977,594
P
–
–
–
–
50,922
10,049
–
–
2,857,754
Share-based
Payments
(Note 24)
=219,350
P
–
–
–
–
(50,874)
–
–
–
–
Cumulative
Translation
Retained
Adjustments
Earnings
(Note 18)
(Note 18)
=1,639,688
P
(478,706)
(478,706)
–
(478,706)
–
–
–
–
–
=31,370,176
P
–
–
7,353,022
7,353,022
–
–
–
(1,200,257)
(2,857,754)
Net Unrealized
Gain on
Assets
(Note 18)
Treasury Stock
(Note 18)
Minority
Interests
Total
Equity
=–
P
(P
=86)
=17,773,236
P
=64,979,958
P
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(16)
–
–
–
–
1,252,384
1,252,384
–
–
–
–
–
–
–
135,568
–
–
–
–
–
–
=16,896,319
P
93,208
–
–
=397,252
P
–
–
–
=1,160,982
P
–
–
–
=34,665,187
P
–
–
–
=–
P
–
–
–
(P
=102)
–
–
850,568
(302,420)
=19,573,768
P
(478,706)
(478,706)
8,605,406
8,126,700
48
10,049
(16)
(1,200,257)
–
135,568
93,208
850,568
(302,420)
=72,693,406
P
*SGVMC108983*
CONSOLIDATED STATEMENTS OF CASH FLOWS
2005
2004
2006 (As Re-presented) (As Re-presented)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Interest expense - net of amount capitalized
Depreciation and amortization (Note 19)
Amortization of discount on long-term debt - net (Note 19)
Swap costs (Note 19)
Equity in net income of associates and joint ventures
Gain on sale of assets
Interest income
Other investment income
Operating income before changes in working capital
Decrease (increase) in:
Accounts and notes receivable
Inventories
Other current assets
Increase (decrease) in:
Accounts payable and accrued expenses
Net pension liabilities
Cash generated from operations
Interest received
Interest paid
Income tax paid
Net cash provided by (used in) operating activities before cash
items associated with noncurrent assets held for sale
Net cash provided by operating activities associated with
Total cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of investments
Disposal of property and equipment
Additions to:
Investments
Property, plant and equipment (Note 11)
Dividends received from associates and joint ventures
Acquisitions through business combinations by a subsidiary - net
of cash acquired (Note 20)
Decrease (increase) in other noncurrent assets
Cash balance of deconsolidated subsidiaries
Net cash provided by (used in) investing activities before cash
items associated with noncurrent assets held for sale
Net cash provided by (used in) investing activities associated
with noncurrent assets held for sale, including cash balance
Net cash provided by (used in) investing activities
P
= 16,189,526
=10,798,723
P
=
P9,899,326
4,964,846
2,590,358
285,431
59,205
–
(8,252,898)
(5,796,711)
(1,520,858)
(285,227)
8,233,672
5,032,559
1,714,677
413,815
134,571
176,303
(8,202,301)
(3,971,188)
(1,753,654)
(596,676)
3,746,829
5,034,923
1,547,993
257,429
86,873
970,227
(7,622,735)
(2,988,461)
(1,513,719)
(265,632)
5,406,224
(3,171,691)
(251,543)
(1,777,903)
(3,504,204)
747,372
(581,725)
(2,718,959)
1,224,942
173,849
1,704,663
403,413
89,130
5,229,741
1,510,885
(5,386,829)
(1,742,356)
5,168,530
(346,614)
(723,008)
4,507,180
1,797,536
(4,343,896)
(1,649,142)
2,014,500
(258,175)
388,511
6,230,892
1,441,778
(6,906,143)
(1,053,490)
(388,559)
311,678
(286,963)
291,672
(96,887)
241,186
552,864
225,067
(61,896)
5,493,837
313,755
7,909,107
527,540
9,885,088
216,887
(5,950,008)
(3,450,654)
4,248,500
(2,898,110)
(1,853,821)
4,499,186
(5,608,358)
(1,071,999)
4,470,072
(1,841,889)
(10,076)
(81)
(5,632,984)
(661,629)
–
–
71,728
(112,335)
(1,196,616)
1,889,289
7,851,083
(361,691)
(1,558,307)
2,071
1,891,360
(648)
7,850,435
(Forward)
*SGVMC108983*
-2-
2005
2004
2006 (As Re-presented) (As Re-presented)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Short-term and long-term debt
Issuance of preferred shares
Issuance of common shares
Proceeds from collection of (additions to) subscriptions
receivable
Payment of short-term and long-term debt
Dividends paid
Redemption of preferred shares (Note 17)
Increase in:
Other noncurrent liabilities
Minority interests in consolidated subsidiaries
Net cash provided by (used in) financing activities
before cash items associated with noncurrent
assets held for sale
Net cash used in financing activities associated with noncurrent
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR (Note 4)
CASH AND CASH EQUIVALENTS AT END
OF YEAR (Notes 4 and 28)
P
= 11,532,591
5,800,000
57,690
=12,556,123
P
–
–
=
P20,830,325
2,500,000
98,299
93,461
(15,346,903)
(3,781,584)
(2,230,000)
(32,438)
(25,497,578)
(2,423,750)
(1,270,000)
10,049
(12,222,412)
(1,245,478)
(2,515,016)
589,672
4,234,992
398,984
3,171,745
1,505,176
441,606
949,919
(13,096,914)
9,402,549
(187,120)
762,799
(271,572)
(13,368,486)
(170,982)
9,231,567
(892,395)
(10,924,262)
17,020,106
24,010,827
34,935,089
17,914,983
P
= 23,118,432
=24,010,827
P
=
P34,935,089
*SGVMC108983*
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
Ayala Corporation (the Company) is incorporated in the Republic of the Philippines. The
Company’s registered office and principal place of business is at Tower One, Ayala Triangle,
Ayala Avenue, Makati City.
The Company is the holding company of the Ayala Group (the Group), with principal business
interests in real estate and hotels, financial services and bancassurance, telecommunications,
electronics, information technology and business process outsourcing services, utilities,
automotives, international and others.
The consolidated balance sheets of Ayala Corporation and Subsidiaries as of December 31, 2006
and 2005, and the related consolidated statements of income, changes in equity and cash flows for
each of the three years in the period ended December 31, 2006, and the summary of significant
accounting policies and other explanatory notes were authorized for issue by the Audit Committee
on February 12, 2007 and by the Executive Committee of the Board of Directors (BOD) on
February 21, 2007.
2. Summary of Significant Accounting Policies
Basis of Preparation
The accompanying consolidated financial statements of the Group have been prepared on a
historical cost basis, except for financial assets at fair value through profit or loss (FVPL),
available-for-sale (AFS) financial assets and derivative financial instruments, that have been
measured at fair value. The consolidated financial statements are presented in Philippine Peso,
and all values are rounded to the nearest thousand pesos (P
=000) except when otherwise indicated.
Statement of Compliance
The consolidated financial statements of Ayala Corporation and Subsidiaries have been prepared
in compliance with Philippine Financial Reporting Standards (PFRS).
Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial year except as
follows:
Amendments to PFRSs and Philippine Interpretations effective in 2006
The Group has adopted the following amendments to PFRS and Philippine Interpretations during
the period.
•
•
•
Philippine Accounting Standards (PAS) 19 Amendment - Employee Benefits
PAS 21 Amendment - The Effects of Changes in Foreign Exchange Rates
PAS 39 Amendments - Financial Instruments: Recognition and Measurement
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•
•
Philippine Interpretation IFRIC - 4, Determining whether an Arrangement contains a Lease
Philippine Interpretation Q&A 2006-1 - PAS 18 Appendix, paragraph 9-Revenue Recognition
for Sales of Property Units under Pre-completion Contracts
Philippine Interpretations early adopted
• Philippine Interpretation IFRIC - 8, Scope of PFRS 2
• Philippine Interpretation IFRIC - 9, Reassessment of Embedded Derivatives
The principal effects of these changes are as follows:
PAS 19, Employee Benefits
Amendment for actuarial gains and losses, group plans and disclosures. As of January 1, 2006,
the Group adopted the amendments to PAS 19. As a result, additional disclosures on the
consolidated financial statements are made, starting in 2006, to provide information about trends
in the assets and liabilities in the defined benefit plans and the assumptions underlying the
components of the defined benefit cost (see Note 23). This change has no recognition nor
measurement impact, as the Group chose not to apply the new option offered to recognize
actuarial gains and losses outside of the consolidated statement of income.
PAS 21, The Effects of Changes in Foreign Exchange Rates
Amendment for net investment in a foreign operation. As of January 1, 2006, the Group adopted
the amendments to PAS 21. This amendment states that all exchange differences arising from a
monetary item that forms part of the Group’s net investment in a foreign operation are recognized
in a separate component of equity in the consolidated financial statements regardless of the
currency in which the monetary item is denominated. This change has no significant impact on
the consolidated financial statements.
PAS 39, Financial Instruments: Recognition and Measurement
Amendment for financial guarantee contracts. This amended the scope of PAS 39 to require
financial guarantee contracts that are not considered to be insurance contracts to be recognized
initially at fair value and to be remeasured at the higher of the amount determined in accordance
with PAS 37, Provisions, Contingent Liabilities and Contingent Assets, and the amount initially
recognized less, when appropriate, cumulative amortization recognized in accordance with
PAS 18, Revenue. This amendment has no significant impact on the consolidated financial
statements.
Amendment for cash flow hedge accounting of forecast intragroup transactions. This amended
PAS 39 to permit the foreign currency risk of a highly probable intragroup forecast transaction to
qualify as the hedged item in a cash flow hedge, provided that the transaction is denominated in a
currency other than the functional currency of the entity entering into that transaction and that the
foreign currency risk will affect the consolidated statement of income. As the Group currently
has no such transactions, the amendment did not have an effect on the consolidated financial
statements.
Amendment for the fair value option. This amended PAS 39 to restrict the use of the option to
designate any financial asset or any financial liability to be measured at fair value through the
statement of income. This amendment has no significant impact on the Group’s consolidated
financial statements.
*SGVMC108983*
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Philippine Interpretation IFRIC - 4, Determining whether an Arrangement contains a Lease. This
Interpretation provides guidance in determining whether arrangements contain a lease to which
lease accounting must be applied. This Interpretation has no impact on the consolidated financial
statements.
Philippine Interpretation Q&A 2006-1–PAS 18, Appendix, paragraph 9-Revenue Recognition for
Sales of Property Units under Pre-completion Contracts, states that the law in different countries
may determine the point in time at which the entity transfers the significant risks and rewards of
ownership and that the examples in the Appendix need to be read in the context of the laws
relating to the sale of goods in the country in which the transaction takes place. In the
Philippines, equitable interest may vest in the buyer before a condominium building is complete
and before legal title passes since the concept of equitable interest is recognized in Presidential
Decree 957, known as the Condominium and Subdivision Buyers’ Protective Decree. Although
the sale of property units under pre-completion contracts is not within the scope of PAS 11,
Construction Contracts, the method of determining the stage of completion and revenue
recognition as provided in that Standard may be referred to for guidance in determining revenue
as the acts are performed.
The adoption of this Interpretation was accounted for retrospectively and resulted in the decrease
in total assets and liabilities amounting to P
=5,609.4 million as of December 31, 2005, as
receivables are now recognized only to the extent of the recognized revenue which is equivalent
to the stage of completion of the project. Any excess of collections over the recognized
receivables are included in the “Accounts payable and accrued expenses” account in the liabilities
section of the consolidated balance sheet. Previously, receivables are recognized in full and the
corresponding unfulfilled obligation is credited to liabilities.
The adoption of the interpretation did not impact the consolidated statement of income.
Philippine Interpretation IFRIC - 8, Scope of PFRS 2
This Interpretation becomes effective for financial years beginning on or after May 1, 2006. It
requires PFRS 2 to be applied to any arrangements where equity instruments are issued for
consideration which appears to be less than fair value. As equity instruments are only issued to
employees in accordance with the employee share scheme, the Interpretation has no impact on the
consolidated financial statements.
Philippine Interpretation IFRIC - 9, Reassessment of Embedded Derivatives
This Interpretation becomes effective for financial years beginning on or after June 1, 2006. It
establishes that the date to assess the existence of an embedded derivative is the date an entity
first becomes a party to the contract, with reassessment only if there is a change to the contract
that significantly modifies the cash flows. The Group assessed that adoption of this Interpretation
has no impact on the consolidated financial statements.
*SGVMC108983*
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Future Changes in Accounting Policies
The Group has not applied the following PFRS and Philippine Interpretations which are not yet
effective for the year ended December 31, 2006:
•
PFRS 7, Financial Instruments: Disclosures, and the complementary amendment to PAS 1,
Presentation of Financial Statements: Capital Disclosures (effective for annual periods
beginning on or after January 1, 2007). PFRS 7 introduces new disclosures to improve the
information about financial instruments. It requires the disclosure of qualitative information
about exposure to risks arising from financial instruments, including specified minimum
disclosures about credit risk, liquidity risk, and market risk, including sensitivity analysis to
market risk. It replaces disclosure requirements in PAS 32, Financial Instruments:
Disclosure and Presentation. It is applicable to all entities that report under PFRS. The
amendment to PAS 1 introduces disclosures about the level of an entity’s capital and how it
manages capital. The Group is currently assessing the impact of PFRS 7 and the amendment
to PAS 1 and expects that the main additional disclosures will be the sensitivity analysis to
market risk and the capital disclosures required by PFRS 7 and the amendment to PAS 1. The
Group will apply PFRS 7 and the amendment to PAS 1 in 2007.
•
PFRS 8, Operating Segments, (effective for annual periods beginning on or after January 1,
2009). This PFRS adopts a management approach to reporting segment information. PFRS 8
will replace PAS 14, Segment Reporting, and is required to be adopted only by entities whose
debt or equity instruments are publicly traded, or are in the process of filing with the
Securities and Exchange Commission (SEC) for purposes of issuing any class of instruments
in a public market. The Group will apply PFRS 8 in 2009 and expects that the adoption of
this standard would not significantly modify the Group’s segment reporting disclosures.
•
Philippine Interpretation IFRIC - 10, Interim Financial Reporting and Impairment (effective
for annual periods beginning on or after November 11, 2006). This Interpretation prohibits
the reversal of impairment loss on goodwill and AFS equity investments recognized in the
interim financial reports even if impairment is no longer present at the annual balance sheet
date. The Group does not expect this interpretation to have a significant impact on the
consolidated financial statements.
•
Philippine Interpretation IFRIC - 11, Group and Treasury Share Transactions (effective for
annual periods beginning on or after March 1, 2007). This Interpretation requires
arrangements whereby an employee is granted rights to an entity’s equity instruments to be
accounted for as an equity-settled scheme by the entity even if the entity chooses or is
required to buy those equity instruments (e.g., treasury shares) from another party, or the
shareholder(s) of the entity provide the equity instruments needed. It also provides guidance
on how subsidiaries, in their separate financial statements, account for such schemes when
their employees receive rights to the equity instruments of the parent. The Group does not
expect this interpretation to have a significant impact on the consolidated financial
statements.
•
Philippine Interpretation IFRIC - 12, Service Concession Arrangements (effective for annual
periods beginning on or after January 1, 2008). This Interpretation establishes the accounting
to be applied for certain infrastructure that is constructed, acquired or provided by the grantor
for the purposes of meeting the concession.
*SGVMC108983*
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IFRIC 12 prescribed the accounting for the rights which the Operator receives from the
Grantor using either:
•
•
•
Financial asset model wherein the Operator shall recognize a financial asset to the extent
that it has an unconditional contractual right to receive cash from the Grantor. The
Operator has an unconditional right to receive cash if the Grantor contractually
guarantees to pay the Operator;
Intangible asset model wherein the Operator shall recognize an intangible asset to the
extent that it receives a right to charge the users (not an unconditional right to receive
cash because the amounts are contingent on the extent that the public uses the service);
Mixed model if the Operator is paid by the users, but the Grantor guarantees a certain
minimum amount to be paid to the Operator, the Financial Asset Model is used to the
extent of such amount.
The Group does not expect this Interpretation to have a significant impact on the consolidated
financial statements.
Basis of Consolidation
The consolidated financial statements comprise the financial statements of the Company and the
following wholly and majority-owned domestic and foreign subsidiaries:
Effective Percentages
of Ownership
2005
2006
Ayala Land, Inc. (ALI) and subsidiaries
Ayala Hotels, Inc. (AHI) and subsidiaries
Electronics, Information Technology and Business
Process Outsourcing Services:
Azalea Technology Investments, Inc. and
subsidiaries
LiveIt Solutions, Inc. and subsidiaries (LiveIt)
HRMall, Inc.
Technopark Land, Inc.
Integrated Microelectronics, Inc. (IMI) and
subsidiaries
Automotive:
Ayala Automotive Holdings Corporation
(AAHC) and subsidiaries
International and Others:
Ayala International Pte. Ltd. (AIPL)
(incorporated in Singapore) and subsidiaries
AC International Finance Limited (ACIFL)
(Cayman Island Company) and subsidiary
57.8
78.9
61.9
81.0
100.0
100.0
100.0
78.8
100.0
–
–
78.8
70.4*
74.4
100.0
100.0
100.0
100.0
100.0
100.0
(Forward)
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AYC Finance Ltd.
Michigan Holdings, Inc. (MHI) and subsidiary
Ayala Aviation Corporation
Darong Agricultural and Development
Corporation
PFC Properties, Inc. and subsidiary
PFN Holdings Corporation
Effective Percentages
of Ownership
2005
2006
–
100.0
100.0
100.0
100.0
100.0
100.0
99.9
–
100.0
99.9
99.9
* a subsidiary of ACIFL in 2006, see below
On October 16, 2006, the Company entered into a Deed of Assignment with AYC Holdings, Ltd.,
a wholly owned subsidiary of ACIFL, where the Company assigned its 832,343,700 shares in IMI
(with original acquisition cost of P
=520.6 million representing approximately 74.4% of IMI's total
outstanding stock) in exchange for 104,112 shares of AYC Holdings (with par value of
US$100 per share). Further, the Company entered into a Deed of Assignment with ACIFL where
the Company assigned its 104,112 shares in AYC Holdings, Ltd. (at a transfer value of
US$10.4 million) in exchange for 10,411,200 additional shares of ACIFL with a par value of
US$1 per share.
Subsidiaries are consolidated from the date of acquisition, being the date on which the Group
obtains control, and continue to be consolidated until the date that such control ceases.
The consolidated financial statements are prepared using uniform accounting policies for like
transactions and other events in similar circumstances. All significant intercompany transactions
and balances, including intercompany profits and unrealized profits and losses, are eliminated in
consolidation.
Acquisitions of subsidiaries are accounted for using the purchase method. The cost of an
acquisition is measured as the fair value of the assets given, equity instruments issued and
liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a
business combination are measured initially at their fair value at the acquisition date, irrespective
of the extent of any minority interests.
Any excess of the cost of the business combination over the Group’s interest in the net fair value
of the identifiable assets, liabilities and contingent liabilities is recognized as goodwill.
Any excess of the Group’s interest in the net fair value of the identifiable assets, liabilities and
contingent liabilities over the cost of business combination is recognized in the statement of
income on the date of acquisition.
Minority interests represent the portion of profit or loss and net assets in subsidiaries not wholly
owned and are presented separately in the consolidated statements of income and changes in
equity and within equity in the consolidated balance sheets, separately from the Company’s
equity.
*SGVMC108983*
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Cash and Cash Equivalents
Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid
investments that are readily convertible to known amounts of cash with original maturities of
three months or less from dates of acquisition and which are subject to an insignificant risk of
changes in value.
Financial Instruments
The Group availed of the exemption under PFRS 1 and as allowed by the SEC, applied PAS 39,
Financial Instruments: Recognition and Measurement, starting from January 1, 2005. The
cumulative effect of adopting PAS 39 was charged to the January 1, 2005 retained earnings. The
policies on financial instruments effective January 1, 2005 follows:
Date of recognition
The Group recognizes a financial asset or a financial liability in the consolidated balance sheet
when it becomes a party to the contractual provisions of the instrument. Purchases or sales of
financial assets that require delivery of assets within the time frame established by regulation or
convention in the marketplace are recognized on the settlement date.
Initial recognition of financial instruments
All financial assets and financial liabilities are recognized initially at fair value. Except for
securities at FVPL, the initial measurement of financial assets includes transaction costs.
Financial instruments are classified as liabilities or equity in accordance with the substance of the
contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or
a component that is a financial liability, are reported as expense or income. Distributions to
holders of financial instruments classified as equity are charged directly to stockholders’ equity
net of any related income tax benefits. Financial instruments are offset when there is a legally
enforceable right to offset and intention to settle either on a net basis or to realize the asset and
settle the liability simultaneously.
Financial assets are further classified into the following categories: Financial asset at FVPL, loans
and receivables, held-to-maturity (HTM), and AFS financial assets. The classification depends on
the purpose for which the investments were acquired and whether they are quoted in an active
market. The Group determines the classification of its investment at initial recognition and,
where allowed and appropriate,
re-evaluates such designation at every reporting date.
Determination of fair value
The fair value for financial instruments traded in active markets at the balance sheet date is based
on their quoted market price or dealer price quotations (bid price for long positions and ask price
for short positions), without any deduction for transaction costs. When current bid and asking
prices are not available, the price of the most recent transaction provides evidence of the current
fair value as long as there has not been a significant change in economic circumstances since the
time of the transaction.
For all other financial instruments not listed in an active market, the fair value is determined by
using appropriate valuation techniques. Valuation techniques include net present value
techniques, comparison to similar instruments for which market observable prices exist, options
pricing models, and other relevant valuation models.
*SGVMC108983*
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Investments in unquoted equity securities are carried at cost net of impairment.
Day 1 profit
Where the transaction price in a non-active market is different to the fair value from other
observable current market transactions in the same instrument or based on a valuation technique
whose variables include only data from observable market, the Group recognizes the difference
between the transaction price and fair value (a Day 1 profit) in the consolidated statement of
income under “interest, fees, rental, investment and other income” account. In cases where use is
made of data which is not observable, the difference between the transaction price and model
value is only recognized in the consolidated statement of income when the inputs become
observable or when the instrument is derecognized. For each transaction, the Group determines
the appropriate method of recognizing the ‘Day 1’ profit amount.
Financial assets at FVPL
Financial assets at FVPL include financial assets held for trading and financial assets designated
upon initial recognition as at FVPL.
Financial assets are classified as held for trading if they are acquired for the purpose of selling in
the near term. Derivatives, including separated embedded derivatives, are also classified as held
for trading unless they are designated as effective hedging instruments or a financial guarantee
contract. Gains or losses on investments held for trading are recognized in the consolidated
statement of income under “Interest, fees, rental, investment and other income” account or
“Interest and other charges” account.
Where a contract contains one or more embedded derivatives, the hybrid contract may be
designated as financial asset at FVPL, except where the embedded derivative does not
significantly modify the cash flows or it is clear that separation of the embedded derivative is
prohibited.
Financial assets may be designated at initial recognition as at FVPL if the following criteria are
met: (i) the designation eliminates or significantly reduces the inconsistent treatment that would
otherwise arise from measuring the assets or recognizing gains or losses on them on a different
basis; or (ii) the assets are part of a group of financial assets which are managed and their
performance evaluated on a fair value basis, in accordance with a documented risk management
strategy; or (iii) the financial instrument contains an embedded derivative that would need to be
separately recorded.
The Group’s financial assets at FVPL pertain to short-term investments included under the “Other
current assets” account in the consolidated balance sheet.
HTM investments
HTM investments are nonderivative financial assets with fixed or determinable payments and
fixed maturities that the Group has the positive intention and ability to hold to maturity. Where
the Group sell other than an insignificant amount of HTM investments, the entire category would
be tainted and reclassified as AFS securities. After initial measurement, these investments are
measured at amortized cost using the effective interest rate method, less impairment in value.
*SGVMC108983*
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Amortized cost is calculated by taking into account any discount or premium on acquisition and
fees that are an integral part of the effective interest rate. Gains and losses are recognized in the
consolidated statement of income when the HTM investments are derecognized or impaired, as
well as through the amortization process. The losses arising from impairment of such investments
shall be recognized in the consolidated statement of income. The effects of restatement on foreign
currency denominated HTM investments are recognized in the consolidated statement of income.
The Group’s HTM investments pertain to bonds included under the “Investments in bonds and
other securities” account in the consolidated balance sheet.
Loans and receivables
Loans and receivables are nonderivative financial assets with fixed or determinable payments that
are not quoted in an active market. They are not entered into with the intention of immediate or
short-term resale and are not designated as AFS or financial asset at FVPL.
After initial measurement, loans and receivables are carried at amortized cost using the effective
interest rate method, less allowance for impairment. Amortized cost is calculated by taking into
account any discount or premium on acquisition and fees that are an integral part of the effective
interest rate. The amortization is included in the “Interest, fees, rental, investment and other
income” account in the consolidated statement of income. The losses arising from impairment of
such loans and receivables are recognized under “General and administrative expenses” account
in the consolidated statement of income.
The Group’s loans and receivables are included under the “Accounts and notes receivable”
account in the consolidated balance sheet. Loans and receivables are included in current assets if
maturity is within 12 months from the balance sheet date.
AFS financial assets
Available-for-sale financial assets are those nonderivative financial assets that are designated as
such or are not classified in any of the three preceding categories. They are purchased and held
indefinitely, and may be sold in response to liquidity requirements or changes in market
conditions.
After initial measurement, AFS financial assets are measured at fair value. The unrealized gains
or losses arising from the fair valuation of AFS financial assets are excluded from reported
earnings and are reported as “Net unrealized gain on available-for-sale financial assets” in the
consolidated statements of changes in equity.
When the security is disposed of, the cumulative gain or loss previously recognized in the
consolidated statement of changes in equity is recognized in the consolidated statement of income
under the “Interest, fees, rental, investment and other income” account or “Interest and other
charges” account. Interest earned on the AFS financial assets is reported as interest income using
the effective interest rate. Dividends earned are recognized in the consolidated statement of
income when the Group’s right to receive payment is established. The losses arising from
impairment of such investments are recognized under “Interest and other charges” account in the
consolidated statement of income.
*SGVMC108983*
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The Group’s AFS financial assets pertain to investments in quoted and unquoted equity securities
included under the “Investment in bonds and other securities” account in the consolidated balance
sheet. AFS financial assets are included in current assets if expected to be realized within
12 months from balance sheet date.
Derivative Financial Instruments
The Group uses derivative financial instruments such as foreign currency contracts and interest
rate swaps to hedge its risks associated with interest rate and foreign currency fluctuations. These
derivative instruments provide economic hedges under the Group’s policies but are not designated
as accounting hedges. Any gains or losses arising from changes in fair value on derivatives that
do not qualify for hedge accounting are taken directly to net profit or loss for the year under
“Interest, fees, rental, investment and other income” account.
The fair value of forward currency contracts is calculated by reference to current forward
exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap
contracts is determined by reference to market values for similar instruments.
An embedded derivative is separated from the host contract and accounted for as a derivative if all
of the following conditions are met: a) the economic characteristics and risks of the embedded
derivative are not closely related to the economic characteristics and risks of the host contract; b)
a separate instrument with the same terms as the embedded derivative would meet the definition
of a derivative; and c) the hybrid or combined instrument is not recognized at fair value through
profit or loss.
In 2005, forward currency contracts with negative fair value are included under the “Other current
liabilities” account in the consolidated balance sheet. The Group has no derivatives (freestanding
or embedded) outstanding as of December 31, 2006.
Impairment of Financial Assets
The Group assesses at each balance sheet date whether there is objective evidence that a financial
asset or group of financial assets is impaired. A financial asset or a group of financial assets is
deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one
or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’)
and that loss event (or events) has an impact on the estimated future cash flows of the financial
asset or the group of financial assets that can be reliably estimated. Evidence of impairment may
include indications that the borrower or a group of borrowers is experiencing significant financial
difficulty, default or delinquency in interest or principal payments, the probability that they will
enter bankruptcy or other financial reorganization and where observable data indicate that there is
measurable decrease in the estimated future cash flows, such as changes in arrears or economic
conditions that correlate with defaults.
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Loans and Receivables and HTM investments
For loans and receivables and HTM investments carried at amortized cost, the Group first
assesses whether objective evidence of impairment exists individually for financial assets that are
individually significant, or collectively for financial assets that are not individually significant. If
the Group determines that no objective evidence of impairment exists for individually assessed
financial asset, whether significant or not, it includes the asset in a group of financial assets with
similar credit risk characteristics and collectively assesses for impairment. Those characteristics
are relevant to the estimation of future cash flows for groups of such assets by being indicative of
the debtors’ ability to pay all amounts due according to the contractual terms of the assets being
evaluated. Assets that are individually assessed for impairment and for which an impairment loss
is, or continues to be, recognized are not included in a collective assessment for impairment.
If there is an objective evidence that an impairment loss has been incurred, the amount of the loss
is measured as the difference between the asset’s carrying amount and the present value of
estimated future cash flows (excluding future credit losses that have not been incurred)
discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate
computed at initial recognition). The carrying amount of the asset is reduced through use of an
allowance account and the amount of the loss is charged to “General and administrative expenses”
account in the consolidated statement of income. Interest income continues to be recognized
based on the original effective interest rate of the asset. Loans, together with the associated
allowance accounts, are written off when there is no realistic prospect of future recovery and all
collateral has been realized. If, in a subsequent period, the amount of the estimated impairment
loss decreases because of an event occurring after the impairment was recognized, the previously
recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is
recognized in profit or loss, to the extent that the carrying value of the asset does not exceed its
amortized cost at the reversal date.
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis
of such credit risk characteristics as industry, past-due status and term.
Future cash flows in a group of financial assets that are collectively evaluated for impairment are
estimated on the basis of historical loss experience for assets with credit risk characteristics
similar to those in the group. Historical loss experience is adjusted on the basis of current
observable data to reflect the effects of current conditions that did not affect the period on which
the historical loss experience is based and to remove the effects of conditions in the historical
period that do not exist currently. The methodology and assumptions used for estimating future
cash flows are reviewed regularly by the Group to reduce any differences between loss estimates
and actual loss experience.
Assets carried at cost
If there is an objective evidence that an impairment loss has been incurred on an unquoted equity
instrument that is not carried at fair value because its fair value cannot be reliably measured, or on
derivative asset that is linked to and must be settled by delivery of such an unquoted equity
instrument, the amount of the loss is measured as the difference between the carrying amount and
the present value of estimated future cash flows discounted at the current market rate of return for
a similar financial asset.
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AFS financial assets
In case of equity investments classified as AFS financial assets, impairment would include a
significant or prolonged decline in the fair value of the investments below its cost. Where there is
evidence of impairment loss, the cumulative loss – measured as the difference between the
acquisition cost and the current fair value, less any impairment loss on that financial asset
previously recognized in the consolidated statement of income – is removed from the consolidated
statement of changes in equity and recognized in the consolidated statement of income.
Impairment losses on equity investments are not reversed through the consolidated statement of
income. Increases in fair value after impairment are recognized directly in the consolidated
statement of changes in equity.
In the case of debt instruments classified as AFS, impairment is assessed based on the same
criteria as financial assets carried at amortized cost. Interest continues to be accrued at the
original effective interest rate on the reduced carrying amount of the asset and is recorded as part
of “Interest, fees, rental, investment and other income” account in the consolidated statement of
income. If, in subsequent year, the fair value of a debt instrument increased and the increase can
be objectively related to an event occurring after the impairment loss was recognized in the
consolidated statement of income, the impairment loss is reversed through the consolidated
statement of income.
Short-term and Long-term Debt
All loans and borrowings are initially recognized at cost, being the fair value of the consideration
received less directly attributable transaction costs.
After initial recognition, short-term and long-term debts are subsequently measured at amortized
cost using the effective interest method. Amortized cost is calculated by taking into account any
issue costs, and any discount or premium on settlement.
Gains and losses are recognized in the consolidated statement of income when the liabilities are
derecognized or impaired, as well as through the amortization process.
Deposits and Retention Payable
Deposits and retention payable are initially measured at fair value. After initial recognition,
deposits and retention payable are subsequently measured at amortized cost using effective
interest rate method.
The difference between the cash received and its fair value is deferred and amortized using the
straight-line method.
Cumulative Redeemable Preferred Shares
Cumulative redeemable preferred shares that exhibit characteristics of a liability is recognized as
a liability in the consolidated balance sheet. The corresponding dividends on those shares are
charged as interest expense in the consolidated statement of income. Upon issuance, cumulative
redeemable preferred shares are carried as a long-term liability on the amortized cost basis until
extinguished on redemption.
*SGVMC108983*
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Derecognition of Financial Assets and Liabilities
Financial Asset
A financial asset (or, where applicable a part of a group of financial assets) is derecognized
where: (a) the rights to receive cash flows from the assets have expired; (b) the Group retains the
right to receive cash flows from the asset, but has assumed an obligation to pay them in full
without material delay to a third-party under a “pass-through” arrangement; or (c) the Group has
transferred its right to receive cash flows from the asset and either (i) has transferred substantially
all the risks and rewards of the asset, or (ii) has neither transferred nor retained the risks and
rewards of the asset but has transferred control of the asset.
Where the Group has transferred its rights to receive cash flows from an asset or has entered into
a pass-through arrangement, and has neither transferred nor retained substantially all the risks and
rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the
Group’s continuing involvement in the asset. Continuing involvement that takes the form of a
guarantee over the transferred asset is measured at the lower of the original carrying amount of
the asset and the maximum amount of consideration that the Group could be required to repay.
Financial Liability
A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or expired. Where an existing financial liability is replaced by another from the same
lender on substantially different terms, or the terms of an existing liability are substantially
modified, such an exchange or modification is treated as a derecognition of the original liability
and the recognition of a new liability, and the difference in the respective carrying amounts is
recognized in the consolidated statement of income.
Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated
balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized
amounts and there is an intention to settle on a net basis, or to realize the asset and settle the
liability simultaneously. This is not generally the case with master netting agreements, and the
related assets and liabilities are presented gross in the consolidated balance sheet.
Inventories
Inventories are carried at the lower of cost and net realizable value (NRV). Costs incurred in
bringing each product to its present location and condition are generally accounted for as follows:
Real estate inventories - cost includes those costs incurred for the development and
improvement of properties, including capitalized borrowing costs.
Vehicles - purchase cost on specific identification basis.
Finished goods and work-in-process - determined on a moving average basis; cost includes
direct materials and labor and a proportion of manufacturing overhead costs based on normal
operating capacity.
Parts and accessories, materials, supplies and others - purchase cost on a moving average
basis.
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NRV for real estate inventories, vehicles, finished goods and work-in-process and parts and
accessories is the estimated selling price in the ordinary course of business, less estimated costs of
completion and estimated costs necessary to make the sale, while NRV for materials, supplies and
others represents the related replacement costs.
Land and Improvements
Land and improvements consist of properties for future development and are carried at the lower
of cost or NRV. Cost includes cost of purchase and those costs incurred for improvement of the
properties.
Investments in Associates and Joint Ventures
Investments in associates and joint ventures are accounted for under the equity method. An
associate is an entity in which the Group has significant influence and which is neither a
subsidiary nor a joint venture. A joint venture is a contractual arrangement whereby two or more
parties undertake an economic activity that is subject to joint control, and a jointly controlled
entity is a joint venture that involves the establishment of a separate entity in which each venturer
has an interest.
Under the equity method, investments in associates and joint ventures are carried in the
consolidated balance sheet at cost plus post-acquisition changes in the Group’s share in the net
assets of the investees, less any impairment in value. Goodwill relating to an associate is included
in the carrying amount of the investment and is not amortized. The Group’s share in the
investee’s post-acquisition profits or losses is recognized in the consolidated statement of income,
and its share of post-acquisition movements in the investee’s equity reserves is recognized
directly in equity. Unrealized gains arising from intercompany transactions are eliminated to the
extent of the Group’s interest thereon. Unrealized losses are eliminated similarly but only to the
extent that there is no evidence of impairment of the asset transferred. Dividends received are
treated as a reduction of the carrying value of the investments.
The Group discontinues applying the equity method when their investments in investee
companies are reduced to zero. Accordingly, additional losses are not recognized unless the
Group has guaranteed certain obligations of the investee companies. When the investee
companies subsequently reports profits, the Group resumes recognizing its share of the profits
only after its share of the profits equals the share of net losses not recognized during the period
the equity method was suspended.
The reporting dates of the investee companies and the Group are identical and the investee
companies’ accounting policies conform to those used by the Group for like transactions and
events in similar circumstances.
Goodwill
Goodwill acquired in a business combination is initially measured at cost being the excess of the
cost of the business combination over the Group’s interest in the net fair value of the acquiree’s
identifiable assets, liabilities and contingent liabilities. After initial recognition, goodwill is
measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment,
annually or more frequently if events or changes in circumstances indicate that the carrying value
may be impaired.
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For the purpose of impairment testing, goodwill acquired in a business combination is, from the
acquisition date, allocated to each of the Group’s cash-generating units, or groups of cashgenerating units, that are expected to benefit from the combination’s synergies. Impairment is
determined by assessing the recoverable amount of the cash-generating unit (group of cashgenerating units), to which the goodwill relates. Where the recoverable amount of the cashgenerating unit is less than the carrying amount, an impairment loss is recognized. Where
goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed
of, the goodwill associated with the operation disposed of is included in the carrying amount of
the operation when determining the gain or loss on disposal of the operation. Goodwill disposed
of in this circumstance is measured on the basis of the relative values of the operation disposed of
and the portion of the cash-generating unit retained.
If the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent
liabilities exceeds the cost of the business combination, the acquirer shall recognized immediately
in the consolidated statement of income any excess remaining after reassessment.
Investment Properties
Investment properties consist of properties that are held to earn rentals, and are not occupied by
the companies in the Group. Investment properties, except for land, are carried at cost less
accumulated depreciation and amortization and any impairment in value. Land is carried at cost
less any impairment in value. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, regardless of utilization. The estimated
useful lives of investment properties are as follows: land improvements - 5 years; and buildings 20 to 40 years.
Investment properties are derecognized when either they have been disposed of or permanently
withdrawn from use and no future economic benefit is expected from its disposal. Any gains or
losses on the retirement or disposal of an investment property are recognized in the consolidated
statement of income in the year of retirement or disposal.
Transfers are made to investment property when there is a change in use, evidenced by ending of
owner-occupation, commencement of an operating lease to another party or ending of
construction or development. Transfers are made from investment property when, and only when,
there is a change in use, evidenced by commencement of owner-occupation or commencement of
development with a view to sale. Transfers between investment property, owner-occupied
property and inventories do not change the carrying amount of the property transferred and they
do not change the cost of the property for measurement or for disclosure purposes.
Property, Plant and Equipment
Property, plant and equipment, except for land, are carried at cost less accumulated depreciation
and amortization and any impairment in value. Land is carried at cost less any impairment in
value. The initial cost of property, plant and equipment consists of its construction cost or
purchase price and any directly attributable costs of bringing the asset to its working condition
and location for its intended use.
Construction-in-progress is stated at cost. This includes cost of construction and other direct
costs. Construction-in-progress is not depreciated until such time that the relevant assets are
completed and put into operational use.
*SGVMC108983*
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Major repairs are capitalized as part of property, plant and equipment only when it is probable
that future economic benefits associated with the item will flow to the Group and the cost of the
items can be measured reliably. All other repairs and maintenance are charged against current
operations as incurred.
Depreciation and amortization of property, plant and equipment commences once the property,
plant and equipment are available for use and computed using the straight-line basis over the
estimated useful life of the asset as follows: buildings and improvements - 3 to 40 years;
machinery and equipment - 3 to 10 years; furniture, fixtures and equipment - 2 to 10 years; and
transportation equipment - 3 to 5 years and hotel property and equipment - 5 to 50 years. Hotel
property and equipment includes the following types of assets and their corresponding estimated
useful lives:
Hotel buildings and improvements
Land improvements
Leasehold improvements
Furniture, furnishing and equipment
Machinery and equipment
Transportation equipment
30-50 years
30 years
5-20 years
5 years
5 years
5 years
The useful life and depreciation and amortization methods are reviewed periodically to ensure
that the period and methods of depreciation and amortization are consistent with the expected
pattern of economic benefits from items of property, plant and equipment.
When property, plant and equipment are retired or otherwise disposed of, the cost and the related
accumulated depreciation and amortization and accumulated provision for impairment losses, if
any, are removed from the accounts and any resulting gain or loss is credited or charged against
current operations.
Intangible Assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of
intangible assets acquired in a business combination is the fair value as at the date of acquisition.
Subsequently, intangible assets are measured at cost less accumulated amortization and provision
for impairment loss, if any. The useful lives of intangible assets with finite life are assessed at the
individual asset level. Intangible assets with finite life are amortized over their useful life.
Periods and method of amortization for intangible assets with finite useful lives are reviewed
annually or earlier when an indicator of impairment exists.
The estimated useful life of intangibles follows:
Customer relationships
Order backlog
Unpatented technology
5 years
6 months
5 years
A gain or loss arising from derecognition of an intangible asset is measured as the difference
between the net disposal proceeds and the carrying amount of the asset and is recognized in the
consolidated statement of income when the asset is derecognized.
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Impairment of Non-financial Assets
The Group assesses as at reporting date whether there is an indication that an asset may be
impaired. If any such indication exists, or when annual impairment testing for an asset is
required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable
amount is calculated as the higher of the asset’s or cash-generating unit’s fair value less costs to
sell and its value in use and is determined for an individual asset, unless the asset does not
generate cash inflows that are largely independent of those from other assets or groups of assets.
Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered
impaired and is written down to its recoverable amount. In assessing value in use, the estimated
future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market
assessment of the time value of money and the risks specific to the asset. Impairment losses of
continuing operations are recognized in the consolidated statement of income in those expense
categories consistent with the function of the impaired asset.
An assessment is made at each reporting date as to whether there is an indication that previously
recognized impairment losses may no longer exist or may have decreased. If such indication
exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed
only if there has been a change in the estimates used to determine the asset’s recoverable amount
since the last impairment loss was recognized. If that is the case, the carrying amount of the asset
is increased to its recoverable amount. That increased amount cannot exceed the carrying amount
that would have been determined, net of depreciation, had no impairment loss been recognized for
the asset in prior years. Such reversal is recognized in the consolidated statement of income
unless the asset is carried at revalued amount, in which case the reversal is treated as revaluation
increase. After such a reversal, the depreciation charge is adjusted in future periods to allocate
the asset’s revised carrying amount, less any residual value, on a systematic basis over its
remaining useful life.
Investments in associates and joint ventures
After application of the equity method, the Group determines whether it is necessary to recognize
any additional impairment loss with respect to the Group’s net investment in the investee
companies. The Group determines at each balance sheet date whether there is any objective
evidence that the investment in associate is impaired. If this is the case, the Group calculates the
amount of impairment as being the difference between the fair value of the investee company and
the carrying cost and recognizes the amount in the consolidated statement of income.
Noncurrent Assets Held for Sale
Noncurrent assets held for sale are carried at the lower of its carrying amount and fair value less
costs to sell. At balance sheet date, the Group classifies assets as held for sale (disposal group)
when their carrying amount will be recovered principally through a sale transaction rather than
through continuing use. For this to be the case the asset must be available for immediate sale in
its present condition subject only to terms that are usual and customary for sales of such assets
and its sale must be highly probable. For the sale to be highly probable, the appropriate level of
management must be committed to a plan to sell the asset and an active program to locate a buyer
and complete the plan must have been initiated. Further, the asset must be actively marketed for
sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be
expected to qualify for recognition as a completed sale within one year from the date of
classification.
*SGVMC108983*
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The related results of operations and cash flows of the disposal group that qualified as
discontinued operation are separated from the results of those that would be recovered principally
through continuing use, and prior years’ consolidated statement of income and cash flows are represented. Results of operations and cash flows of the disposal group that qualified as
discontinued operation are presented in the consolidated statement of income and cash flows as
items associated with noncurrent assets held for sale.
Provisions
Provisions are recognized when the Group has a present obligation (legal or constructive) as a
result of a past event, it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. Where the Group expects a provision to be reimbursed, the reimbursement is
recognized as a separate asset but only when the reimbursement is virtually certain. If the effect
of the time value of money is material, provisions are determined by discounting the expected
future cash flows at a pre-tax rate that reflects current market assessments of the time value of
money and, where appropriate, the risks specific to the liability. Where discounting is used, the
increase in the provision due to the passage of time is recognized as interest expense. Provisions
are reviewed at each balance sheet date and adjusted to reflect the current best estimate.
Treasury Shares
Own equity instruments which are reacquired are carried at cost and are deducted from equity.
No gain or loss is recognized in the consolidated statement of income on the purchase, sale, issue
or cancellation of the Group’s own equity instruments.
Revenue and Cost Recognition
Revenue and cost from sales of completed projects by real estate subsidiaries is accounted for
using the full accrual method. The percentage of completion method is used to recognize income
from sales of projects where the subsidiaries have material obligations under the sales contracts to
complete the project after the property is sold. Under this method, gain is recognized as the
related obligations are fulfilled, measured principally on the basis of the estimated completion of
a physical proportion of the contract work. Any excess of collections over the recognized
receivables are included in the “Accounts payable and accrued expenses” account in the liabilities
section of the consolidated balance sheet.
Revenue from construction contracts are recognized using the percentage of completion method,
measured principally on the basis of the estimated physical completion of the contract work.
Contract costs include all direct materials and labor costs and those indirect costs related to
contract performance. Expected losses on contracts are recognized immediately when it is
probable that the total contract costs will exceed total contract revenue. Changes in contract
performance, contract conditions and estimated profitability, including those arising from contract
penalty provisions, and final contract settlements which may result in revisions to estimated costs
and gross margins are recognized in the year in which the changes are determined.
Rent income from investment properties is recognized in the consolidated statement of income
either on a straight-line basis over the lease term or based on a certain percentage of the gross
revenue of the tenants, as provided under the terms of the lease contract.
*SGVMC108983*
-19 -
Revenue from sales of electronic products and vehicles are recognized when the significant risks
and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be
measured reliably.
Revenue from hotel operations are recognized when services are rendered. Revenue from
banquets and other special events are recognized when the events take place.
Revenue from internet operations are recognized when services are rendered and goods are
delivered.
Management fees from administrative services, property management and other fees are
recognized when services are rendered.
Interest is recognized as it accrues (using the effective interest method that is the rate that exactly
discounts estimated future cash receipts through the expected life of the financial instrument to
the net carrying amount of the financial asset).
Dividend income is recognized when the Group’s right to receive payment is established.
Pension Cost
Pension cost is actuarially determined using the projected unit credit method. This method
reflects services rendered by employees up to the date of valuation and incorporates assumptions
concerning employees’ projected salaries. Actuarial valuations are conducted with sufficient
regularity, with option to accelerate when significant changes to underlying assumptions occur.
Pension cost includes current service cost, interest cost, expected return on any plan assets,
actuarial gains and losses and the effect of any curtailments or settlements.
The liability recognized in the consolidated balance sheet in respect of the defined benefit plans is
the present value of the defined benefit obligation at the balance sheet date less the fair value of
the plan assets. The defined benefit obligation is calculated annually by independent actuaries
using the projected unit credit method. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows using risk-free interest rates that
have terms to maturity approximating the terms of the related pension liability.
The net pension asset is the lower of the fair value of the plan assets less the present value of the
defined benefit obligation at the balance sheet date, together with adjustments for unrecognized
actuarial gains or losses and past service costs that shall be recognized in future periods, or the
total of any cumulative unrecognized net actuarial losses and past service cost and the present
value of any economic benefits available in the form of refunds from the plan or reductions in the
future contributions to the plan.
Actuarial gains and losses is recognized as income or expense if the cumulative unrecognized
actuarial gains and losses at the end of the previous reporting period exceeded the greater of 10%
of the present value of defined benefit obligation or 10% of the fair value of plan assets. These
gains or losses are recognized over the expected average remaining working lives of the
employees participating in the plans.
*SGVMC108983*
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Income Taxes
Current tax assets and liabilities for the current and prior periods are measured at the amount
expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used
to compute the amount are those that are enacted or substantially enacted by the balance sheet
date.
Deferred income tax is provided, using the balance sheet liability method, on all temporary
differences, with certain exceptions, at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary differences, with certain
exceptions. Deferred tax assets are recognized for all deductible temporary differences,
carryforward benefit of unused tax credits from excess of minimum corporate income tax (MCIT)
over the regular corporate income tax and unused net operating loss carryover (NOLCO), to the
extent that it is probable that taxable profit will be available against which the deductible
temporary differences and carryforward benefits of unused tax credits and NOLCO can be
utilized.
Deferred tax liabilities are not provided on non-taxable temporary differences associated with
investments in domestic subsidiaries, associates and interests in joint ventures. With respect to
investments in foreign subsidiaries, associates and interests in joint ventures, deferred tax
liabilities are recognized except where the timing of the reversal of the temporary difference can
be controlled and it is probable that the temporary difference will not reverse in the foreseeable
future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to
the extent that it is no longer probable that sufficient taxable profits will be available to allow the
deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each balance
sheet date and are recognized to the extent that it has become probable that future taxable profit
will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the
period when the asset is realized or the liability is settled, based on tax rates and tax laws that
have been enacted or substantially enacted at the balance sheet date.
Income tax relating to items recognized directly in equity are recognized in equity and not in the
consolidated statement of income.
Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set
off current tax assets against current tax liabilities and the deferred taxes relate to the same
taxable entity and the same taxation authority.
Leases
Finance leases, which transfer substantially all the risks and benefits incidental to ownership of
the leased item, are capitalized at the inception of the lease at the fair value of the leased property
or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned
between the finance charges and reduction of the lease liability so as to achieve a constant rate of
interest on the remaining balance of the liability. Finance charges are charged directly against
income.
*SGVMC108983*
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Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the
assets or the respective lease terms.
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset
are classified as operating leases. Fixed lease payments are recognized on a straight-line basis
over the lease term. Variable rent is recognized as income based on the terms of the lease
contract.
The determination of whether an arrangement is, or contains a lease is based on the substance of
the arrangement at inception date of whether the fulfillment of the arrangement is dependent on
the use of a specific asset or assets or the arrangement conveys a right to use the asset. A
reassessment is made after inception of the lease only if one of the following applies: (a) there is a
change in contractual terms, other than a renewal or extension of the arrangement; (b) a renewal
option is exercised or extension granted, unless the term of the renewal or extension was initially
included in the lease term; (c) there is a change in the determination of whether fulfillment is
dependent on a specified asset; or (d) there is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date when the
change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) and at the date
of renewal or extension period for scenario (b).
For arrangements entered into prior to January 1, 2005, the date of inception is deemed to be
January 1, 2005 in accordance with the transitional requirements of IFRIC 4.
Borrowing Costs
Borrowing costs are generally expensed as incurred. Interest and other financing costs incurred
during the construction period on borrowings used to finance property development are
capitalized as part of development cost (included in real estate inventories, land and
improvements, investment properties and property, plant and equipment). Capitalization of
borrowing costs commences when the activities to prepare the asset are in progress and
expenditures and borrowing costs are being incurred. The capitalization of these borrowing costs
ceases when substantially all the activities necessary to prepare the asset for its intended use or
sale are complete. If the carrying amount of the asset exceeds its recoverable amount, an
impairment loss is recorded. Capitalized borrowing cost is based on the applicable weighted
average borrowing rate.
Interest expense on loans is recognized using the effective interest rate method over the term of
the loans.
Where an interest rate swap agreement is entered into as a means of reducing the effects of
interest rate fluctuations on cash flows, gains or losses arising from this transaction are credited or
charged to current operations.
*SGVMC108983*
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Foreign Currency Translation/Transactions
The functional and presentation currency of Ayala Corporation and its Philippine subsidiaries
(except IMI), is the Philippine Peso (P
=). Each entity in the Group determines its own functional
currency and items included in the financial statements of each entity are measured using that
functional currency. Transactions in foreign currencies are initially recorded in the functional
currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in
foreign currencies are retranslated at the functional currency rate of exchange ruling at the
balance sheet date. All differences are taken to the consolidated statement of income with the
exception of differences on foreign currency borrowings that provide a hedge against a net
investment in a foreign entity. These are taken directly to equity until the disposal of the net
investment, at which time they are recognized in the consolidated statement of income. Tax
charges and credits attributable to exchange differences on those borrowings are also dealt with in
equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are
translated
using the exchange rate as at the date of initial transaction. Non-monetary items measured at fair
value in a foreign currency are translated using the exchange rates at the date when the fair value
was determined.
The functional currency of AIPL and IMI is US Dollars ($). As at the reporting date, the assets
and liabilities of these subsidiaries are translated into the presentation currency of the Group at
the rate of exchange ruling at the balance sheet date and their statement of income are translated
at the weighted average exchange rates for the year. The exchange differences arising on the
translation are taken directly to a separate component of equity. On disposal of a foreign entity,
the deferred cumulative amount recognized in equity relating to that particular foreign operation
shall be recognized in the consolidated statement of income.
The Company uses forward exchange contracts as a means of managing well-defined foreign
currency risks and providing greater flexibility in managing cash flows. Forward swaps are
valued based on the mark-to-market quotes from banks at each reporting date. Any premium or
discount is amortized over the period of the contract and charged or credited to current operations.
Share-based Payments
The Company and its subsidiaries have equity-settled, share-based compensation plans with its
employees.
PFRS 2 Options
For options granted after November 7, 2002 that have not vested on or before January 1, 2005, the
cost of equity-settled transactions with employees is measured by reference to the fair value at the
date on which they are granted. The fair value is determined by using the Black-Scholes model,
further details of which are given in Note 24.
The cost of equity-settled transactions is recognized, together with a corresponding increase in
equity, over the period in which the performance conditions are fulfilled, ending on the date on
which the relevant employees become fully entitled to the award (‘vesting date’). The cumulative
expense recognized for equity-settled transactions at each reporting date until the vesting date
reflects the extent to which the vesting period has expired and the Group’s best estimate of the
number of equity instruments that will ultimately vest. The income or expense for a period
represents the movement in cumulative expense recognized as at the beginning and end of that
period.
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No expense is recognized for awards that do not ultimately vest, except for awards where vesting
is conditional upon a market condition, which are treated as vesting irrespective of whether or not
the market condition is satisfied, provided that all other performance conditions are satisfied.
Where the terms of an equity-settled award are modified, as a minimum, an expense is recognized
as if the terms had not been modified. In addition, an expense is recognized for any increase in
the value of the transaction as a result of the modification, as measured at the date of
modification.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of
cancellation, and any expense not yet recognized for the award is recognized immediately.
However, if a new award is substituted for the cancelled award, and designated as a replacement
award on the date that it is granted, the cancelled and new awards are treated as if they were a
modification of the original award, as described in the previous paragraph.
Pre-PFRS 2 Options
For options granted before November 7, 2002 that have vested before January 1, 2005, the
intrinsic value of stock options determined as of grant date is recognized as expense over the
vesting period.
The dilutive effect of outstanding options is reflected as additional share dilution in the
computation of diluted earnings per share (see Note 22).
Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income applicable to common
stockholders by the weighted average number of common shares issued and outstanding during
the year and adjusted to give retroactive effect to any stock dividends declared during the period.
Diluted EPS is computed by dividing net income applicable to common stockholders by the
weighted average number of common shares issued and outstanding during the year after giving
effect to assumed conversion of dilutive potential common shares.
Segment Reporting
The Group’s operating businesses are organized and managed separately according to the nature
of the products and services provided, with each segment representing a strategic business unit
that offers different products and serves different markets. Financial information on business
segments is presented in Note 25.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. These are
disclosed unless the possibility of an outflow of resources embodying economic benefits is
remote. Contingent assets are not recognized in the consolidated financial statements but
disclosed when an inflow of economic benefits is probable.
Subsequent Events
Post year-end events that provide additional information about the Group’s position at the balance
sheet date (adjusting events) are reflected in the consolidated financial statements. Post year-end
events that are not adjusting events are disclosed in the notes to the consolidated financial
statements when material.
*SGVMC108983*
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3. Significant Accounting Judgments and Estimates
The preparation of the accompanying consolidated financial statements in conformity with PFRS
requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. The estimates and assumptions used
in the accompanying financial statements are based upon management’s evaluation of relevant
facts and circumstances as of the date of the financial statements. Actual results could differ from
such estimates.
Judgments
In the process of applying the Group’s accounting policies, management has made the following
judgments, apart from those involving estimations, which have the most significant effect on the
amounts recognized in the consolidated financial statements:
Revenue Recognition
Selecting an appropriate revenue recognition method for a particular real estate sale transaction
requires certain judgments based on, among others:
•
•
Buyer’s commitment on the sale which may be ascertained through the significance of the
buyer’s initial investment ; and
Stage of completion of the project.
Operating Lease Commitments - Group as Lessor
The Group has entered into commercial property leases on its investment property portfolio. The
Group has determined that it retains all significant risks and rewards of ownership of these
properties which are leased out on operating leases.
Distinction between Investment Properties and Owner-occupied Properties
The Group determines whether a property qualifies as investment property. In making its
judgment, the Group considers whether the property generates cash flows largely independent of
the other assets held by an entity. Owner-occupied properties generate cash flows that are
attributable not only to property but also to the other assets used in the production or supply
process.
Some properties comprise a portion that is held to earn rentals or for capital appreciation and
another portion that is held for use in the production or supply of goods or services or for
administrative purposes. If these portions cannot be sold separately as of balance sheet date, the
property is accounted for as investment property only if an insignificant portion is held for use in
the production or supply of goods or services or for administrative purposes. Judgment is applied
in determining whether ancillary services are so significant that a property does not qualify as
investment property. The Group considers each property separately in making its judgment.
*SGVMC108983*
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Impairment of AFS financial assets
The Group treats AFS financial assets as impaired when there has been a significant or prolonged
decline in the fair value below its cost or where other objective evidence of impairment exists.
The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Group treats
‘significant’ generally as 20% or more and ‘prolonged’ as greater than 6 months for quoted equity
securities. In addition, the Group evaluates other factors, including normal volatility in share
price for quoted equities and the future cash flows and the discount factors for unquoted equities.
Contingencies
The Group is currently involved in various legal proceedings. The estimate of the probable costs
for the resolution of these claims has been developed in consultation with outside counsel
handling the defense in these matters and is based upon an analysis of potential results. The
Group currently does not believe that these proceedings will have a material effect on the Group’s
financial position. It is possible, however, that future results of operations could be materially
affected by changes in the estimates or in the effectiveness of the strategies relating to these
proceedings (see Note 31).
Management’s Use of Estimates
The key assumptions concerning the future and other sources of estimation uncertainty at the
balance sheet date that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are discussed below.
Revenue and cost recognition
The Company’s revenue recognition policies require management to make use of estimates and
assumptions that may affect the reported amounts of revenues and costs. The Company’s revenue
from real estate and construction contracts are recognized based on the percentage of completion
measured principally on the basis of the estimated completion of a physical proportion of the
contract work, and by reference to the actual costs incurred to date over the estimated total costs
of the project.
Estimating allowance for doubtful accounts
The Group maintains allowance for doubtful accounts at a level based on the result of the
individual and collective assessment under PAS 39. Under the individual assessment, the Group
is required to obtain the present value of estimated cash flows using the receivable’s original
effective interest rate. Impairment loss is determined as the difference between the receivable’s
carrying balance and the computed present value. The collective assessment would require the
Group to group its receivables based on the credit risk characteristics (industry, customer type,
customer location, past-due status and term) of the customers. Impairment loss is then determined
based on historical loss experience of the receivables grouped per credit risk profile. Historical
loss experience is adjusted on the basis of current observable data to reflect the effects of current
conditions that did not affect the period on which the historical loss experience is based and to
remove the effects of conditions in the historical period that do not exist currently. The
methodology and assumptions used for the individual and collective assessments are based on
management's judgment and estimate. Therefore, the amount and timing of recorded expense for
any period would differ depending on the judgments and estimates made for the year. See Note 5
for the related balances.
*SGVMC108983*
-26 -
Evaluation of asset impairment
The Group reviews land and improvements, investments in associates and joint ventures,
property, plant and equipment and investment properties for impairment of value. This includes
considering certain indications of impairment such as significant changes in asset usage,
significant decline in assets’ market value, obsolescence or physical damage of an asset, plans in
the real estate projects, significant underperformance relative to expected historical or projected
future operating results and significant negative industry or economic trends.
As described in the accounting policy, the Group estimates the recoverable amount as the higher
of the net selling price and value in use. In determining the present value of estimated future cash
flows expected to be generated from the continued use of the assets, the Group is required to
make estimates and assumptions that may affect land and improvements, investments in associates
and joint ventures, investment properties, and property, plant and equipment. See Notes 8, 10 and
11 for the related balances.
Estimating useful lives of property, plant and equipment, investment properties and intangible
assets.
The Group estimated the useful lives of its property, plant and equipment and investment
properties and intangible assets based on the period over which the assets are expected to be
available for use. The estimated useful lives of property, plant and equipment and investment
properties are reviewed at least annually and are updated if expectations differ from previous
estimates due to physical wear and tear and technical or commercial obsolescence on the use of
these assets. It is possible that future results of operations could be materially affected by
changes in these estimates brought about by changes in factors mentioned above. A reduction in
the estimated useful lives would increase depreciation expense and decrease noncurrent assets.
See Notes 10 and 11 for the related balances.
Impairment of Goodwill
The Group determines whether goodwill is impaired at least on an annual basis. This requires an
estimation of the recoverable amounts which is the net selling price or value in use of the cashgenerating units to which the goodwill is allocated.
Deferred tax assets
The Group reviews the carrying amounts of deferred income taxes at each balance sheet date and
reduces deferred tax assets to the extent that it is no longer probable that sufficient taxable profit
will be available to allow all or part of the deferred tax assets to be utilized. However, there is no
assurance that the Group will generate sufficient taxable profit to allow all or part of deferred tax
assets to be utilized. The Group looks at its projected performance in assessing the sufficiency of
future taxable income. See Note 21 for the related balances.
Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded in the consolidated
balance sheet cannot be derived from active markets, they are determined using internal valuation
techniques using generally accepted market valuation models. The inputs to these models are
taken from observable markets where possible, but where this is not feasible, estimates are used in
establishing fair values. These estimates may include considerations of liquidity, volatility, and
correlation. See Note 28 for the related balances.
*SGVMC108983*
-27 -
Share-based payments
The expected life of the options is based on the expected exercise behavior of the stock option
holders and is not necessarily indicative of the exercise patterns that may occur. The volatility is
based on the average historical price volatility which may be different from the expected volatility
of the shares of stock of the Group. See Note 24 for the related balances.
Estimating pension obligation and other retirement benefits
The determination of the Group’s obligation and cost of pension and other retirement benefits is
dependent on the selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions are described in Note 23 and include among others, discount rates, expected
returns on plan assets and rates of salary increase. While the Group believes that the assumptions
are reasonable and appropriate, significant differences in the actual experience or significant
changes in the assumptions materially affect retirement obligations. See Note 23 for the related
balances.
4. Cash and Cash Equivalents
This account consists of the following:
Cash on hand and in banks
Cash equivalents
2005
2006
(In Thousands)
P
=3,222,262
P
=3,082,502
20,788,565
20,035,930
P
=24,010,827
P
=23,118,432
Cash in banks earns interest at the prevailing bank deposit rates. Cash equivalents are short-term
investments that are made for varying periods of up to three months depending on the immediate
cash requirements of the Group, and earn interest at the respective short-term investment rates.
5. Accounts and Notes Receivable
Trade
Advances
Related parties (see Note 27)
Dividends
2005
(As Restated)
2006
(In Thousands)
P
=11,931,935
P
=11,894,098
2,053,765
4,364,002
1,621,711
1,935,112
531,499
1,262,538
(Forward)
*SGVMC108983*
-28 -
Advances to contractors
Notes receivable
Others
Less allowance for doubtful accounts (see Note 27)
Less noncurrent portion
2005
(As Restated)
2006
(In Thousands)
P
=583,890
P
=675,504
119,838
125,709
509,018
174,050
17,351,656
20,431,013
412,439
441,637
16,939,217
19,989,376
5,631,132
2,519,816
P
=11,308,085
P
=17,469,560
The sales contract receivables, included under trade receivables, are collectible in monthly
installments over a period of one to ten years and bear annual interest rates ranging from 10.25%
to 16% computed on the diminishing balance of the principal.
6. Inventories
2005
2006
(In Thousands)
Real estate inventories:
Subdivision land for sale (see Note 15)
At cost
At NRV
Condominium, residential and commercial
units for sale - at cost (see Note 15)
Materials, supplies and others - at NRV (cost of
=1,142,846 in 2006 and P
P
=1,787,258 in 2005)
Work-in-process - at cost
Vehicles - at cost
Finished goods - at NRV (cost of P
=74,949 in 2005)
Parts and accessories - at NRV (cost of P
=110,386 in
2006 and P
=72,560 in 2005)
P
=3,798,338
867,126
P
=3,265,179
867,126
3,070,123
2,622,120
1,029,214
482,824
256,041
216,587
1,728,003
154,556
247,640
68,442
83,669
P
=9,803,922
45,840
P
=8,998,906
*SGVMC108983*
-29 -
7. Other Current Assets
2005
2006
(In Thousands)
P
=852,309
P
=2,302,694
486,800
534,398
412,311
479,748
438,849
644,475
P
=2,190,269
P
=3,961,315
Short-term investments (see Note 28)
Prepaid expenses
Value-added input tax
Others
Short-term investments include investment in government securities and The Rohatyn Group
(TRG) Allocation LP. TRG Allocation LP’s underlying asset is that of a fund that invests
primarily in emerging market securities, including debt, equities and currencies. As of
December 31, 2006, the investments have a fair value of P
=1,951.1 million and $7.3 million,
respectively.
8. Investments in Associates and Joint Ventures
2005
2006
(In Thousands)
P
=44,847,095
P
=49,424,793
18,419,504
17,226,423
541,111
1,917,467
P
=63,807,710
P
=68,568,683
Acquisition cost
Accumulated equity in net income
Cumulative translation adjustments
The Group’s equity in the net assets of its associates and joint ventures and the related
percentages of ownership are shown below.
Percentage of
Ownership
2005
2006
Domestic:
Bank of the Philippine Islands and subsidiaries (BPI)
Globe Telecom, Inc. and subsidiaries (Globe)*
Emerging City Holdings, Inc. (ECHI) *
Manila Water Company, Inc. (MWCI)*
Cebu Holdings, Inc. and subsidiaries (CHI)
North Triangle Depot Commercial Corporation
(NTDCC)
33.9
34.3
50.0
30.0
47.2
35.9
34.6
50.0
30.4
47.2
49.0
49.0
Carrying Amounts
2005
2006
(In Millions)
=
P29,190
P
=29,860
20,771
22,606
2,649
3,088
2,157
2,576
1,672
1,724
1,044
1,044
(Forward)
*SGVMC108983*
-30 -
Percentage of
Ownership
2005
2006
Domestic:
Berkshires Holdings, Inc. (BHI) *
Philwater Holdings Company, Inc. (Philwater)*
Asiacom Philippines, Inc. (Asiacom)*
Alabang Commercial Corporation (ACC)*
ALI Property Partners Holdings Corporation
(APPHC)*
Foreign:
Arch Capital Management Co. Ltd. (ARCH Capital)*
Hermill Investment Pte. Ltd.* (Singaporean company)
Others
Carrying Amounts
2005
2006
(In Millions)
=
P940
P
=957
925
947
698
747
431
491
50.0
60.0
60.0
50.0
50.0
60.0
60.0
50.0
60.0
–
130
–
65.0
–
Various
–
23.3
Various
3,271
–
1,128
P
=68,569
–
1,632
1,699
=
P63,808
* Joint venture companies
The Group’s investments accounted for under joint venture amounted to P
=34,835.3 million and
=30,226.0 million as of December 31, 2006 and 2005, respectively.
P
Financial information on significant investees (amounts in millions, except earnings per share)
follows:
BPI and subsidiaries
Total resources
Total liabilities
Minority interest
Net interest income
Other income
Other expenses
Net income attributable to:
Equity holders of the bank
Minority interests
Earnings per share
Basic
Diluted
Globe and subsidiaries
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Redeemable preferred stock
2006
P
=581,970
516,483
1,048
19,960
10,641
17,427
2005
P
=529,285
469,217
1,540
18,863
9,252
15,382
9,040
154
8,383
171
3.34
3.34
3.11
3.11
2006
P
=24,215
100,365
124,580
25,758
41,874
67,632
793
2005
P
=22,894
102,208
125,102
24,233
49,250
73,483
793
(Forward)
*SGVMC108983*
-31 -
Globe and subsidiaries
Net operating revenue
Costs and expenses
Net income
Earnings per share:
Basic
Diluted
MWCI
Current assets
Noncurrent assets
Total assets
Current liabilities
Noncurrent liabilities
Total liabilities
Redeemable preferred stock
Revenue
Costs and expenses
Net income
Earnings per share:
Basic
Diluted
2006
P
=61,110
43,650
11,755
2005
P
=59,845
45,664
10,315
88.56
88.32
76.74
76.60
2006
P
=7,605
16,657
24,263
4,650
7,738
12,389
200
6,785
4,559
2,394
2005
P
=3,582
14,347
17,929
3,308
4,498
7,806
300
5,763
3,823
2,012
1.05
1.05
0.94
0.93
The fair value of investment in associates for which there are published price quotations,
amounted to P
=60,588.4 million and P
=45,107.5 million as of December 31, 2006 and 2005,
respectively.
The following significant transactions affected the Group’s investment in its investees:
Investment in BPI
In 2006, the Company received 20% stock dividends from its investment in BPI.
On September 1, 2005, BPI acquired 92% of the share capital of Prudential Bank, Inc.
(Prudential) for cash consideration of P
=5,619 million. In addition, in accordance with the
provisions of the plan of merger approved by the Bangko Sentral ng Pilipinas and by the SEC on
December 21 and December 29, 2005, respectively, BPI issued 9.99 million of its common shares
with fair value of P
=515 million to the 8% minority shareholders of Prudential.
Investment in Globe
In 2005, Globe offered to purchase one share for every fifteen shares (1:15) of its outstanding
common stock from all stockholders of record as of February 10, 2005 at P
=950.00 per share. The
buyback program allowed Globe to purchase up to 9,326,924 shares representing 6.67% of its
outstanding common shares. Each shareholder was entitled to tender a proportionate number of
shares at the 1:15 ratio for purchase by Globe upon and subject to the terms and conditions of the
tender offer. The Company participated in the buyback program up to the number of shares it was
allowed to tender.
*SGVMC108983*
-32 -
The Company also holds 60% of Asiacom Philippines, Inc., which owns 158,515,021 Globe
preferred shares.
Investment in MWCI
On December 23, 2004, the Company entered into an agreement with Philwater to assign and
transfer its 200.0 million participating preferred shares of MWCI in exchange for 60% ownership
or 200.0 million common shares of Philwater. The assignment of shares became effective on
January 31, 2005 when the SEC approved the increase in the authorized capital stock of Philwater
and the assignment as payment by the Company of its subscription to such increase.
On February 3, 2005, the SEC approved the amendment of the articles of incorporation of MWCI
to: (a) change the par value of the participating preferred shares from P
=1.00 to P
=0.10 per share;
(b) increase the number of participating preferred shares from 400.0 million to 4.0 billion; and
(c) provide that the participating preferred shares shall be participating at a rate of one-tenth of
dividends paid to common shares.
On March 18, 2005, MWCI launched its initial public offering in which a total of 745.3 million
common shares were offered at an offer price of P
=6.50 per share. Of the total common shares
offered, 244.6 million shares were from MWCI’s unissued capital stock; 305.4 million shares
were from MWCI’s treasury stock; and 195.3 million shares were from MWCI’s existing
shareholders. In addition, the Company together with some of MWCI’s existing shareholders
granted the underwriter a 30-day option, from the listing date, to purchase up to 78.5 million
common shares at the offer price, of which the underwriter exercised its option over 53.7 million
common shares.
The issuance of additional MWCI common shares to the public and the secondary sale of the
Company’s common shares in MWCI decreased the effective ownership of the Company from
46.2% in 2004 to 30.4% in 2005.
Investment in NTDCC
In 2004, ALI acquired an additional 30.89% interest in NTDCC in exchange for ALI’s interest in
two companies valued at P
=320.1 million and cash amounting to P
=280.0 million. ALI infused
additional cash in NTDCC amounting to P
=112.0 million for an additional 1.85% equity interest in
the latter.
NTDCC was granted development rights by MRT Development Co. to construct and operate a
commercial center under certain terms and conditions until the end of a 50-year lease term
renewable for another 25 years. NTDCC officially started the construction of the shopping center
in 2005.
Investment in APPHC
In 2006, ALI signed an agreement with MLT Investments Ltd. (MIL) and Filipinas Investments
Ltd. (FIL) to jointly develop a BPO office building in Dela Rosa Street and to purchase the
existing PeopleSupport Building.
APPHC, the newly formed joint-venture company, is 60% owned by ALI. The remaining 40%
interest is split evenly between MIL and FIL. APPHC is jointly controlled by ALI, MIL, and FIL.
*SGVMC108983*
-33 -
Investment in ARCH Capital
In 2006, the Company and ALI entered into a Shareholders’ Agreement with ARCH Capital and
Great ARCH Co. Limited, wherein the Company and ALI will invest as much as US$75.0 million
in a private equity Fund that will explore property markets in Asia, excluding Japan and
Philippines.
The Company’s investment will be made through AIPL which has a strong record of experience
in direct property investments in Asia and the United States. ALI (through a subsidiary) and
AIPL will both have interests in the fund management company, ARCH Capital, which will raise
third party capital and pursue investments for the Fund.
As of December 31, 2006, the private equity Fund has not been formed. The total amount of
investment and deposits to ARCH Capital amounted to P
=3,271 million.
The excess of cost of investments over the Group’s equity in the net assets of their investees
accounted for under the equity method amounted to P
=10.9 billion and P
=11.4 billion as of
December 31, 2006 and 2005, respectively.
9. Investments in Bonds and Other Securities
This account consists of investments in:
2005
2006
(In Thousands)
AFS equity investments
Quoted
Unquoted
HTM investments
Bonds
P
=2,373,486
961,374
3,334,860
P
=1,785,924
186,207
1,972,131
127,575
P
=3,462,435
100,836
P
=2,072,967
The quoted equity investments include investments in TRG Global Opportunity Fund (GOF) and
TRG Special Opportunity Fund (SOF). The GOF is a multi-strategy hedge fund which invests
primarily in emerging markets securities. The SOF focuses on less liquid assets in emerging
markets (Latin America, Asia, Emerging Europe, Middle East and Africa) such as distressed
debt, NPLs, corporate high yield, mid and small cap stocks, real estate (debt and equity) and
private equity.
The unquoted equity investments include 11% minority stake in eTelecare Global Solutions, Inc.
Unquoted equity investments classified as AFS are carried at cost less any accumulated
impairment losses, as their fair values cannot be reliably measured.
Effective interest rates for bonds ranged from 9.1% to 11.4% in 2006 and 8.4% to 11.4% in 2005.
*SGVMC108983*
-34 -
10. Investment Properties
The movements of investment properties follow:
2006
2005
(In Thousands)
Cost
At January 1
Additions
Disposals
Transfers
At December 31
Accumulated depreciation and amortization
and impairment losses
At January 1
Depreciation and amortization (see Note 19)
Provision for (reversal of) impairment loss
Disposals
At December 31
Net book value
P
=21,083,187
547,476
(757,161)
649,594
21,523,096
P
=19,664,126
944,799
(575,838)
1,050,100
21,083,187
4,071,348
734,332
(3,584)
(73,662)
4,728,434
P
=16,794,662
3,524,465
557,786
10,252
(21,155)
4,071,348
P
=17,011,839
Certain parcels of land are leased to several individuals and corporations. Some of the lease
contracts provide, among others, that within a certain period from the expiration of the contracts,
the lessee will have to demolish and remove all improvements (such as buildings) introduced or
built within the leased properties. Otherwise, the lessor will cause the demolition and removal
thereof and charge the cost to the lessee unless the lessor occupies and appropriates the same for
its own use and benefit.
The fair value of the investment properties has been determined based on valuations performed by
independent professional qualified appraisers. The fair value represents the amount at which the
assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing
seller in an arm’s length transaction at the date of valuation. The aggregate fair value of the
Group’s investment properties amounted to P
=125.1 billion in 2006 and P
=124.4 billion in 2005.
The value of the land and condominium units was arrived at by the Market Data Approach. In
this approach, the value of the land and condominium units is based on sales and listings of
comparable property registered within the vicinity. The technique of this approach requires the
establishing of comparable property by reducing reasonable comparative sales and listings to a
common denominator. This is done by adjusting the differences between the subject property and
those actual sales and listings regarded as comparable. The properties used as basis of comparison
are situated within the immediate vicinity of the subject property.
Consolidated rental income from investment properties, included in the sales and services in the
consolidated statements of income amounted to P
=4.5 billion in 2006, P
=4.2 billion in 2005 and
=4.0 billion in 2004. Direct operating expenses pertaining to rental operations, included in the
P
cost of sales and services amounted to P
=2.1 billion in 2006, P
=2.0 billion in 2005 and P
=1.4 billion
in 2004.
*SGVMC108983*
-35 -
11. Property, Plant and Equipment
The movements of property, plant and equipment follow:
Land,
Buildings and
Improvements
(see Note 15)
Cost
At January 1
Additions
Addition through business
combination
Disposals
Transfers
At December 31
Accumulated depreciation
and amortization and
impairment loss
At January 1
Depreciation and amortization
for the year
Disposals
Transfers
At December 31
Net book value
Cost
At January 1
Additions
combination
Disposals
Transfers
At December 31
Accumulated depreciation
and amortization and
impairment loss
At January 1
for the year
Disposals/transfers
At December 31
Net book value
P
= 2,807,882
185,800
Machinery
and
Equipment
(see Note 26)
P
= 3,653,294
1,297,867
Hotel
Property and
Furniture,
Equipment
Fixtures and Transportation
(see Note 15)
Equipment
Equipment
As of December 31, 2006
(In Thousands)
P
= 4,824,337
264,260
P
= 3,532,735
415,071
P
= 824,329
227,115
Constructionin-Progress
Total
P
= 854,930
1,060,541
P
= 16,497,507
3,450,654
–
(247,344)
688,695
3,435,033
–
(105,064)
1,481,421
6,327,518
–
(31,218)
(2,355,170)
2,702,209
1,120
(18,563)
(1,861,462)
2,068,901
1,353
(115,111)
–
937,686
1,257,544
1,933,196
1,850,516
1,026,467
512,230
205,222
(33,287)
–
1,429,479
P
= 2,005,554
917,909
(67,219)
–
2,783,886
P
= 3,543,632
177,105
(25,453)
(676,017)
1,326,151
P
= 1,376,058
257,196
(3,146)
–
1,280,517
P
= 788,384
123,989
(89,603)
–
546,616
P
= 391,070
–
–
–
–
P
= 952,377
Land,
Buildings and
Improvements
(see Note 15)
Machinery
and
Equipment
(see Note 26)
Hotel
Property and
Furniture,
Equipment
Fixtures and Transportation
(see Note 15)
Equipment
Equipment
(In Thousands)
Constructionin-Progress
Total
=985,912
P
729,561
=13,828,802
P
1,853,821
=3,103,310
P
229,936
=2,641,840
P
511,121
=4,800,887
P
42,867
=1,533,440
P
204,468
=763,413
P
135,868
–
(552,246)
26,882
2,807,882
587,276
(86,943)
–
3,653,294
–
(19,417)
–
4,824,337
1,797,735
(174,765)
171,857
3,532,735
12,314
(87,266)
–
824,329
1,124,621
1,509,722
1,691,273
1,054,470
450,929
202,077
(69,154)
1,257,544
P
= 1,550,338
458,901
(35,427)
1,933,196
P
= 1,720,098
168,618
(9,375)
1,850,516
P
= 2,973,821
171,558
(199,561)
1,026,467
P
= 2,506,268
126,575
(65,274)
512,230
P
= 312,099
–
(4,846)
(958,248)
952,377
–
–
(2,473)
(858,070)
854,930
–
–
–
–
P
= 854,930
2,473
(522,146)
(3,004,764)
16,423,724
6,579,953
1,681,421
(218,708)
(676,017)
7,366,649
P
= 9,057,075
2,397,325
(923,110)
(659,331)
16,497,507
5,831,015
1,127,729
(378,791)
6,579,953
P
= 9,917,554
Consolidated depreciation and amortization of property, plant and equipment amounted to
=1,681.4 million in 2006, P
P
=1,127.7 million in 2005 and P
=988.9 million in 2004 (see Note 19).
*SGVMC108983*
-36 -
12. Intangible Assets
The movements of intangible assets follow:
Goodwill
Cost
At January 1
combination (see Note 20)
Exchange differences
At December 31
Accumulated amortization
and impairment loss
Amortization (see note 19)
At December 31
Net book value
P
= 2,300,742
P
=684,861
P
=5,309
P
= 5,309
Total
P
=2,996,221
1,817,398
–
4,118,140
–
(49,149)
635,712
–
(381)
4,928
–
(381)
4,928
1,817,398
(49,911)
4,763,708
–
–
–
P
=4,118,140
132,354
(5,212)
127,142
P
=508,570
5,130
(202)
4,928
P
=–
1,026
(40)
986
P
= 3,942
138,510
(5,454)
133,056
P
=4,630,652
Goodwill
Cost
At January 1
Additions
combination (see Note 20)
Disposals
At December 31
Customer
Order
Unpatented
Relationship
Backlog
Technology
(In Thousands)
P
=72,704
–
2,430,706
(27,467)
(175,201)
=2,300,742
P
Customer
Order
Unpatented
Relationship
Backlog
Technology
(In Thousands)
=–
P
684,861
–
–
–
=684,861
P
=–
P
5,309
–
–
–
=5,309
P
=–
P
5,309
–
–
–
=5,309
P
Total
=
P72,704
695,479
2,430,706
(27,467)
(175,201)
=
P2,996,221
13. Noncurrent Assets Held for Sale
In 2006, the Group had negotiations to sell its equity interests in Makati Property Ventures, Inc.
(MVPI) and Hermill Investments Pte. Ltd. (Hermill).
Ayala Hotels, Inc., together with Ocmador Philippines B. V., agreed to sell MPVI, to DBS
Trustee Ltd. (Trustee of Ascott Residence Trust) on or about March 22, 2007 (Closing date).
AIPL, through its 100%-owned Ayala International Holdings Limited (AIHL), entered into a Sale
and Purchase Agreement (SPA) with Hotel Properties Limited (HPL) on January 17, 2007 for
the sale of its 23.3% interest in Hermill, the holding company for The Forum Shopping Mall, a
17-storey retail-cum-office development along Orchard Road in Singapore. The consideration for
AIHL’s 23.3% stake is Singapore Dollars (SGD) 47 million. The SPA further provides that if,
within 3 years from the Completion Date of March 2007, Hermill is able to obtain approval from
the Singapore government for the demolition and re-development of The Forum Shopping Mall,
HPL shall pay AIHL SGD 3.5 million.
*SGVMC108983*
-37 -
Only the MPVI transaction met the requirements for presentation as discontinued operation. The
results of MPVI are presented below:
2006
Sales and services
Interest, fees, investment and other income
Cost of sales and services
Depreciation
General administrative expenses
Interest and other financing charges
Provision for income tax
Income associated with noncurrent
P
=733,261
12,871
746,132
339,457
102,446
23,475
39,527
85,969
590,874
P
=155,258
2005
(In Thousands)
=673,147
P
12,177
685,324
304,054
102,673
42,661
47,283
57,974
554,645
=130,679
P
2004
=664,894
P
10,984
675,878
297,527
99,379
67,641
63,881
46,888
575,316
=100,562
P
The major classes of assets and liabilities of MPVI and Hermill classified as held for sale as of
December 31, 2006 are as follows:
At Carrying
Amounts
(In Thousands)
ASSETS
Cash
Accounts and notes receivable - net
Inventories
Investment in joint venture
Property and equipment
Deferred tax assets
Noncurrent assets held for sale
LIABILITIES
Income tax payable
Current portion of long-term debt
Long-term debt
Liabilities directly associated with noncurrent
P
=324,362
44,382
4,407
5,446
1,574,167
1,679,153
22,672
3,895
P
=3,658,484
P
=145,269
45,167
139,821
138,843
P
=469,100
Long-term debt comprise a fixed rate $5.7 million bank loan having an effective rate of 8.55%
repayable in full on September 15, 2008.
*SGVMC108983*
-38 -
EPS on income associated with noncurrent assets held for sale attributable to equity holders of the
Company:
2006
Income associated with noncurrent assets
held for sale
Less: Income associated with noncurrent
assets held for sale attributable to
minority interests
Weighted average number of common shares
for basic EPS
Dilutive shares arising from stock options
Adjusted weighted average number of
common shares for diluted EPS
Basic EPS
Diluted EPS
2005
(In Thousands, except EPS)
2004
P
=155,258
=130,679
P
=100,562
P
108,681
46,577
91,475
39,204
70,393
30,169
344,204
1,691
343,381
1,390
342,966
1,681
345,895
P
=0.14
P
=0.13
344,771
=0.11
P
=0.11
P
344,647
=
P0.09
=
P0.09
14. Accounts Payable and Accrued Expenses
Dividends payable
Interest payable
Related parties (see Note 27)
2005
(As Restated)
2006
(In Thousands)
P
=15,247,799
P
=16,404,495
821,921
964,931
1,044,113
824,086
197,412
132,204
P
=17,311,245
P
=18,325,716
15. Short-term and Long-term Debt
Short-term debt consists of:
2005
2006
(In Thousands)
Foreign currency debt - with interest rates ranging
from 4.1% to 6.4% per annum in 2006 and 1.2%
to 8.3% per annum in 2005
Philippine peso debt - with interest rates ranging
from 6.1% to 7.8% per annum in 2006 and 6.8%
to 8.5% per annum in 2005
P
=815,787
P
=4,707,155
1,688,220
P
=2,504,007
1,447,250
P
=6,154,405
*SGVMC108983*
-39 -
In 2005, IMI obtained an US$80.0 million syndicated bridge loan facility from a foreign bank to
finance the acquisition of the shares of Speedy-tech Electronics Ltd. (STEL). The loan is due
within one year, with an interest rate per annum equal to the aggregate of 1.25% plus US$
LIBOR, extendable by another year subject to the agreement between IMI and the foreign bank.
IMI paid the loan when it matured in 2006.
The Philippine peso debt consists mainly of ALI and its subsidiaries’ bank loans of
=1,556.0 million in 2006 and P
P
=1,427.0 million in 2005. These are unsecured peso-denominated
short-term borrowings with interest rates ranging from 6.1% to 7.6% per annum in 2006 and 7.5%
to 8.5% per annum in 2005.
Long-term debt consists of:
2005
2006
(In Thousands)
Company:
Bank loans - with interest rates ranging from
5.3% to 11.0% per annum in 2006 and 5.7%
to 11.0% per annum in 2005 and varying
maturity dates up to 2013
Syndicated term loans with interest rates ranging
from 10.6% to 12.0% per annum and varying
maturity dates up to 2008
Fixed Rate Corporate Notes (FXCNs) with
interest rates ranging from 10.0% to 10.4%
per annum and varying maturity dates up to
2012
Bonds, due 2009
Subsidiaries:
Loans from banks and other institutions:
Foreign currency - with interest rates ranging
from 5.9% to 12.8% per annum in 2006
and 6.4% to 6.6% per annum in 2005
Philippine peso - with interest rates ranging
from 7.8% to 12.0% per annum in 2006
and 7.7% to 15.0% per annum in 2005
Bonds
Due 2007
Due 2008
Due 2009
FXCNs
Other US dollar-denominated obligations:
8.125% Guaranteed Euro Notes
Less current portion
P
=6,294,697
P
=6,054,167
1,250,000
2,350,000
7,190,000
7,000,000
21,734,697
7,200,000
7,000,000
22,604,167
8,154,932
8,841,961
2,658,451
2,905,288
3,000,000
2,000,000
42,960
3,580,000
3,000,000
2,000,000
–
950,000
6,706,393
26,142,736
47,877,433
9,359,594
P
=38,517,839
9,191,111
26,888,360
49,492,527
2,985,240
P
=46,507,287
*SGVMC108983*
-40 -
Parent Company
While the Company’s long-term loans are generally unsecured, due to certain regulatory
constraints in the local banking system regarding loans to directors, officers, stockholders and
related interest, some of the Company’s credit facilities with a local bank are secured by shares
of stock of a consolidated subsidiary with carrying value of P
=2,794.2 million in 2006 and
=5,501.8 million in 2005 in accordance with strict local central bank regulations.
P
All credit facilities of the Company outside of this local bank are unsecured, and their respective
credit agreements provide for this exception. The Company positions its deals across various
currencies, maturities and product types to provide utmost flexibility in its financing transactions.
The Company also uses swaps and forward contracts as a way of minimizing the costs and risk of
financing (see Note 28).
As of December 31, 2006, the Company has undrawn borrowing facilities from local banks
amounting to P
=5.0 billion.
In 2005, the Company issued FXCNs consisting of 5- and 7-year notes to various financial
institutions with fixed interest rates ranging from 10.0% to 10.4% per annum.
In 2004, the Company issued 12.677% Fixed Rate Bonds with an aggregate principal amount of
=7.0 billion to mature in 2009. Prior to maturity, the Company may redeem outstanding bonds on
P
any coupon payment date beginning in 2007. The bonds have been rated “PRS Aaa” by
Philippine Ratings Services Corporation (PhilRatings).
Subsidiaries
Foreign Currency Debt
As of December 31, 2006, the Company, through a wholly owned subsidiary, has undrawn credit
facility amounting to US$150.0 million.
In 2006, the Company, through a wholly owned subsidiary, extended for 3 years a loan with a
foreign bank, with the Company as guarantor, for US$20 million at a rate of 105 bps over 1-, 3- or
6-month US$ LIBOR at the Company’s option.
In 2004, the Company, through a wholly owned subsidiary, entered into a 5-year loan with a local
bank, with the Company as guarantor, for US$46 million at a rate per annum equal to LIBOR plus
applicable margin ranging from 0.90% to 1.98%, payable in six unequal semi-annual installments.
The loan was prepaid in 2006.
In 2003, the Company, through a wholly owned subsidiary, entered into 5-year loan with a
commercial bank, with the Company as guarantor, for up to US$120 million at a rate of 240
points over the 1-, 3- or 6-month LIBOR at the Company’s option, drawable in various tranches
over a period of 12 months.
Philippine Peso Debt
In 2006, ALI launched its Homestarter Bonds of up to P
=169.2 million with fixed interest rate of
5% per annum. The Homestarter Bonds are being issued monthly in a series for a period of thirty
six (36) months with final maturity in March 2009. On maturity date, the principal amount of the
bond is redeemable with the accrued interest. Should the bondholder decide to purchase an Ayala
*SGVMC108983*
-41 -
Land property, he is entitled to an additional 10% of the aggregate face value of the bond as
bonus credit which together with the principal and accrued interest can be applied as
downpayment. As of end 2006, P
=42.96 million of these bonds were outstanding.
In 2006, ALI issued P
=3.0 billion FXCNs consisting of 5-, 7- and 10-year notes issued to various
financial institutions and will mature on various dates up to 2016. The FXCNs bear fixed interest
rates ranging from 7.25% to 7.75% per annum depending on the term of the notes.
=2.0 billion bonds due in 2008 with fixed and floating rate tranches. The
fixed-rate bonds carry a coupon of 10.75% per annum and have a nominal principal amount of
=1.0 billion. The floating rate bonds, also worth P
P
=1.0 billion, bear a margin of 125 bps over
benchmark 91-day MART 1 and are re-priced quarterly. These bonds have been rated “PRS Aaa”
by Philratings.
In 2003, the Company through a wholly owned subsidiary issued an 8.125% Guaranteed Euro
Notes, due 2008, amounting to US$200 million at 99.496% of its face value.
=3.0 billion bonds due in 2007, with interest at 200 bps over benchmark
91-day T-Bills based on secondary market bids (MART 1). These bonds have been rated “PRS
Aaa” by Philratings.
ALI’s unsecured long-term bank loan matured in October 2006. In 2005, ALI prepaid a total of
=1.35 billion in long-term bank loans.
P
In 2002, ALI issued 10-year FXCNs with fixed interest rate of 14.875% per annum due 2012.
ALI may redeem all (but not part only) of the FXCNs on the 7th anniversary. ALI paid FXCNs
that were due in 2005, 2007 and 2009. As of end 2006, P
=580.0 million of these bonds are
outstanding.
ALI subsidiaries’ loans will mature on various dates up to 2011 with floating interest rates at 150
bps to 250 bps spread over benchmark 91-day T-Bills and fixed interest rates of 8.25% to 12% per
annum. These borrowings are secured by mortgages on real estate properties, hotel property and
equipment and leasehold rights with a total carrying value of P
=3.6 billion and P
=3.5 billion in 2006
and 2005, respectively. ALI pledged its investment in shares of stock of Station Square East
Commercial Corporation (SSECC), ALI’s subsidiary, with a carrying value of P
=1.5 billion and
=2.1 billion as of December 31, 2006 and 2005, respectively, as collateral to secure the latter’s
P
bank loans.
The loan agreements on long-term debt of the Company and certain subsidiaries provide for
certain restrictions and requirements with respect to, among others, payment of dividends,
incurrence of additional liabilities, investments and guaranties, mergers or consolidations or other
material changes in their ownership, corporate set-up or management, acquisition of treasury
stock, disposition and mortgage of assets and maintenance of financial ratios at certain levels.
These restrictions and requirements were complied with by the Group.
Interest capitalized by subsidiaries, amounted to P
=186.5 million in 2006 and P
=297.0 million in
2005. The average capitalization rate is 8.19% and 13.94% in 2006 and 2005, respectively.
*SGVMC108983*
-42 -
16. Other Noncurrent Liabilities
2005
2006
(In Thousands)
P
=3,393,363
P
=3,809,082
540,342
794,810
1,436,680
1,537,173
P
=5,370,385
P
=6,141,065
Deposits and deferred credits
Retentions payable
Other liabilities
17. Cumulative Redeemable Preferred Shares
The details as to the number of preferred shares of the Company follow:
Authorized
2006
Preferred
A
AA
B
900,000
300,000
–
1,200,000
No. of Shares
Issued and Outstanding
2005
2005
2006
(In Thousands)
4,000,000
1,000,000
2,000,000
7,000,000
500,000
–
–
500,000
900,000
46,000
–
946,000
The preferred shares are nonvoting, nonparticipating, cumulative and redeemable. Such shares
enjoy preference in case of liquidation but are excluded from the preemptive rights in the issuance
of preferred and common shares. The preferred shares are identical in all respects, except that:
a. Preferred AA are redeemable on the fifth year from issue date while the Preferred A shares
are redeemable at such time as may be determined by the BOD.
b. In 2005, the Preferred B shares were convertible into common shares at any time, six months
after issue date, at a premium to be determined and fixed by the BOD and redeemable on the
fifth year from issue date.
On February 10, 2006, the BOD approved the reclassification of the unissued preferred shares and
redeemed preferred shares of the Company into 58 million new class of Preferred B shares with a
par value of P
=100 per share or an aggregate par value of P
=5,800 million. The new preferred
shares, to be known as Preferred B shares, have the following features: (a) optional redemption by
the Company; (b) issue value, dividend rate and declaration thereof to be determined by the BOD;
(c) cumulative in payment of current dividends as well as any unpaid back dividends and nonparticipating in any other further dividends; (d) non-convertible into common shares;
(e) preference over holders of common stock in the distribution of corporate assets in the event of
dissolution and liquidation of the Company and in the payment of the dividend at the rate
specified at the time of issuance; (f) non-voting except in those cases specifically provided by
law; (g) no pre-emptive rights to any issue of shares, common or preferred; and, (h) reissuable
when fully redeemed (see Note 18).
*SGVMC108983*
-43 -
In 2004, the Company issued the equivalent of P
=1,000 million Preferred A
shares at an amount of P
=5 per share with a dividend rate of 10.4% and 10.5% per annum,
respectively. These Preferred A shares will be redeemed at 100% of issue price at the end of the
5th year from issue date.
In 2003, the Company issued the equivalent of P
=2,000 million Preferred A shares at an amount of
=5 per share. These Preferred A shares bear dividends at the rate of 10.6% per annum and were
P
redeemed in February 2006 at the end of three years from issue date.
In 2001, the Company issued an equivalent of P
=1,000 million Preferred AA
shares, respectively, at an amount of P
=5 per share. These Preferred AA issues bear dividends at a
rate of the average 91-day T-Bill Rate payable quarterly and redeemable at the issue price. These
preferred shares were redeemed in 2004 and 2006.
18. Equity
The details of the Company’s common and equity preferred shares follow:
2006
Authorized shares
Par value per share
Issued and subscribed shares
380,000
P
=50
344,854
Common shares
Preferred B shares
2005
2004
2005
2004
2006
(In Thousands, except par value)
380,000 19,000,000
–
–
58,000
=50
P
=1
P
–
–
P
=100
343,493 17,161,904
–
–
58,000
In July 2006, the Company filed a primary offer in the Philippines of its Preferred B shares at an
offer price of P
=100 per share to be listed and traded on the Philippine Stock Exchange. The
Preferred B shares are cumulative, nonvoting and redeemable at the option of the Company under
such terms that the BOD may approve at the time of the issuance of shares and with dividend rate
of 9.4578% per annum. The Preferred B shares may be redeemed at the option of the Company
starting in the fifth year.
The common shares may be owned or subscribed by or transferred to any person, partnership,
association or corporation regardless of nationality, provided that at anytime at least 60% of the
outstanding capital stock shall be owned by citizens of the Philippines or by partnerships,
associations or corporations 60% of the voting stock or voting power of which is owned and
controlled by citizens of the Philippines.
The details of the Company’s paid-up capital follow:
Additional
Paid-in Subscriptions
Capital
Receivable
Total
Paid-up
Capital
Preferred
Stock - B
Common
Stock
Subscribed
P
=–
–
5,800,000
P
=17,137,083
29,881
–
P
=37,544
38,210
–
P
=118,643
216,700
–
(P
=333,574) P
=16,959,696
93,461
378,252
–
5,800,000
P
=5,800,000
P
=17,166,964
P
=75,754
P
=335,343
(P
=240,113) P
=23,137,948
(In Thousands)
As of January 1, 2006
Exercise of ESOP/ESOWN
Issuance of shares
*SGVMC108983*
-44 -
Common
Stock
Subscribed
=17,124,360
P
12,723
=37,544
P
–
=17,137,083
P
=37,544
P
Common
Stock
Subscribed
Exercise of ESOP
Issuance of shares
Declaration of 20% stock dividends
=14,249,537
P
15,323
1,746
2,857,754
=39,242
P
–
(1,698)
–
=17,124,360
P
=37,544
P
Additional
Capital
Receivable
Total
Paid-up
Capital
(In Thousands)
=35,551
P
(P
=301,136) P
=16,896,319
83,092
(32,438)
63,377
=118,643
P
(P
=333,574) P
=16,959,696
Additional
Total
Paid-up
Capital
Receivable
Capital
(In Thousands)
=–
P
(P
=311,185) P
=13,977,594
35,551
–
50,874
–
10,049
10,097
–
–
2,857,754
=35,551
P
(P
=301,136) P
=16,896,319
The movements in the Company’s outstanding common shares follow:
2006
At January 1
Exercise of options
Stock dividends
Treasury stock
343,488
1,362
–
–
344,850
2005
(In Thousands)
343,238
254
–
(4)
343,488
2004
285,776
307
57,155
–
343,238
On December 7, 2006, the BOD approved the increase of the authorized common capital stock
from P
=19.0 billion divided into 380,000,000 shares to P
=30.0 billion divided into 600,000,000
shares with a par value of P
=50 per share. The BOD likewise approved the declaration of a 20%
stock dividend to all common stockholders to be issued from the increased authorized capital
stock. As of February 21, 2007, the said increase and stock dividends are still subject to
ratification of the stockholders and the approval of the SEC.
On December 9, 2004, the Company’s BOD approved a reverse stock split of one share for every
50 shares held. This was approved by the stockholders on April 7, 2005 and subsequently by the
SEC on May 20, 2005.
In 2004, the Company declared a 20% stock dividend out of retained earnings amounting to
=2,857.8 million. Fractional shares were consolidated into whole shares and redeemed by the
P
Company as treasury stock at a price based on the market value of the shares as of record date.
Retained earnings include the accumulated equity in undistributed net earnings of consolidated
subsidiaries, associates and joint ventures accounted for under the equity method amounting to
=24,858.9 million, P
P
=15,430.9 million as of December 31, 2006, 2005 and
2004, respectively. These amounts are not available for dividend declaration until received in the
form of dividends from the subsidiaries, associates and joint ventures.
Retained earnings are further restricted for the payment of dividends to the extent of the cost of
the common shares held in treasury consisting of 4,379 as of December 31, 2006 and 2005 and
216 common shares as of December 31, 2004.
*SGVMC108983*
-45 -
Dividends consist of the following:
2005
2004
2006
(In Thousands, except dividends per share)
Dividends to common shares
Cash dividends declared during the year
Cash dividends per share
Stock dividends
Proposed for approval at annual
stockholders’ meeting
Dividends to equity preferred shares
Declared during the year
P
= 2,756,618
P
=8.00
–
20% stock
dividend
=1,376,037
P
=4.00
P
–
=
P1,200,257
=
P3.50
20%
–
2,857,754
274,276
–
–
Net unrealized gain on financial assets includes fair value changes on AFS investments.
Cumulative translation adjustments are used to record exchange differences arising from the
translation of the financial statements of foreign subsidiaries. It is also used to record the Group’s
share of the associates’ equity reserve on fluctuation in value of investments.
19. Costs and Expenses
Depreciation and amortization expense included in the consolidated statements of income are as
follows:
2006
Included in:
General and administrative expenses
P
=1,960,042
630,316
P
=2,590,358
2005
(In Thousands)
=1,243,495
P
471,182
=1,714,677
P
2004
=1,159,737
P
388,256
=1,547,993
P
Personnel costs included in the consolidated statements of income are as follows:
2006
Included in:
General and administrative expenses
P
=834,699
3,848,299
P
=4,682,998
2005
(In Thousands)
=720,468
P
3,041,488
=3,761,956
P
2004
=748,659
P
2,535,255
=3,283,914
P
*SGVMC108983*
-46 -
General and administrative expenses included in the consolidated statements of income are as
follows:
2006
Personnel costs (see Notes 23, 24 and 27)
Professional fees
Taxes and licenses
Transportation and travel
Rental and utilities
Representation
Advertising and promotions
Postal and communication
Donations and contributions
Repairs and maintenance
Provision for doubtful accounts
Others
P
=3,848,299
630,316
574,881
349,229
347,977
253,519
188,911
158,455
126,733
106,969
81,239
81,196
960,437
P
=7,708,161
2005
2004
(In Thousands)
=3,041,488
P
P2,535,255
=
471,182
388,256
375,825
411,014
240,930
302,337
246,878
224,608
157,090
138,593
123,474
155,604
129,398
199,495
93,234
88,838
99,927
62,921
79,487
74,322
101,418
23,321
850,993
466,853
=6,011,324
P
=5,071,417
P
Interest and other charges consist of:
2006
Interest expense on:
Long-term debt
Short-term debt
Dividends on preferred shares
Amortization of discount on long-term debt net of accretion of premium
Provision for decline/writedown of assets
(see Note 6)
Swap costs
Others
2005
(In Thousands)
2004
P
=4,160,169
512,997
291,681
=3,630,831
P
845,377
556,351
=3,695,803
P
745,679
593,441
59,205
134,571
86,873
–
–
386,919
P
=5,410,971
1,915,740
176,303
303,560
=7,562,733
P
–
970,227
502,812
=6,594,835
P
Foreign exchange differences recognized in profit or loss amounted to P
=72.4 million in 2006 and
=291.1 million in 2005. Reversal of impairment losses and impairment losses amounted to
P
P
=10.3 million in 2005, respectively.
*SGVMC108983*
-47 -
20. Business Combination
PFRS 3 provides that if the initial accounting for a business combination can be determined only
provisionally by the end of the period in which the combination is effected because either the fair
values to be assigned to the acquiree’s identifiable assets, liabilities or contingent liabilities or the
cost of the combination can be determined only provisionally, the acquirer shall account for the
combination using those provisional values. The acquirer shall recognize any adjustments to
those provisional values as a result of completing the initial accounting within twelve months of
the acquisition date as follows; (i) the carrying amount of the identifiable asset, liability or
contingent liability that is recognized or adjusted as a result of completing the initial accounting
shall be calculated as if its fair value at the acquisition date had been recognized from that date;
(ii) goodwill or any gain recognized shall be adjusted by an amount equal to the adjustment to the
fair value at the acquisition date of the identifiable asset, liability or contingent liability being
recognized or adjusted; and (iii) comparative information presented for the periods before the
initial accounting for the combination is complete shall be presented as if the initial accounting
had been completed from the acquisition date.
2006 Acquisitions
On October 7, 2006, Conoda, Inc., a subsdiary of LiveIt, entered into an Agreement and Plan of
Merger with Integreon Managed Solutions, Inc. (Integreon) for the purchase of all Integreon
shares. The amount of $18.0 million was put in Integreon.
On December 15, 2006, Next Life, Inc., a subsidiary of LiveIt, entered into an Agreement and
Plan of Merger with Affinity, Inc. (Affinity) for the purchase of all Affinity shares for a total
consideration of $28.0 million.
The purchase price allocation has been prepared on a preliminary basis, and reasonable changes
are expected as additional information becomes available. The following is a summary of the
provisional fair values of the assets acquired and liabilities assumed as of the date of the
acquisition:
Cash and cash equivalents
Trade and other receivables
Property, plant and equipment - net
Intangible asset
Fair Value
Recognized
on Acquisition
(In Thousands)
P
=83,719
202,485
5,189
222,380
95,239
692
609,704
181,028
152,104
71,065
404,197
(Forward)
*SGVMC108983*
-48 -
Fair Value
Recognized
on Acquisition
(In Thousands)
P
=205,507
(24,522)
1,742,256
P
=1,923,241
Net assets
Minority interests
Goodwill arising on acquisition (see Note 12)
Total consideration, satisfied by cash
Cash flow on acquisition follows:
Net cash acquired with the subsidiary
Cash paid
Net cash outflow
P
=83,719
1,923,241
P
=1,839,522
From the date of acquisition, Integreon has contributed P
=188.2 million loss to the net income of
the Group. If the contribution had taken place at the beginning of the year, the net income for the
Group would have decreased by P
=169.9 million loss and revenue would have increased by
=522.5 million. No income was recorded from Affinity since the business combination was
P
completed in December 2006.
2005 Acquisitions
On January 29, 2005, IMI Group entered into an Asset Purchase Agreement (APA) with Saturn
Electronics and Engineering (Tustin), Inc. (Saturn Tustin) and Saturn Electronics Philippines, Inc.
(Saturn Philippines) for the purchase of certain assets and existing service contracts with
prevailing customers, and the assumption of certain liabilities of Saturn Tustin and Saturn
Philippines for a total consideration of $8.0 million. Saturn Tustin is a United States-based global
provider of value-added electronics manufacturing services (EMS) and original design
manufacturing (ODM) services to equipment manufacturers and their suppliers. Saturn Tustin
owns all of the outstanding capital stock of Saturn Philippines. The fair values of the identifiable
assets and liabilities of Tustin and Saturn as at the date of purchase follow:
Accounts receivable
Inventories
Refundable deposits
Accounts payable
Net assets
Acquisition cost, net of cash acquired
Goodwill
Saturn Tustin Saturn Philippines
$111,124
$3,155,188
1,659,219
–
13,099
70,231
41,912
102,914
1,061,478
2,617,191
(83,559)
(1,774,837)
$1,144,054
$5,829,906
Total
$3,266,312
1,659,219
83,330
144,826
3,678,669
(1,858,396)
6,973,960
7,630,570
$656,610
Assets and liabilities acquired and assumed, including service contracts, by IMI from Tustin were
transferred to IMI USA, Inc. (a wholly owned subsidiary of IMI). The bill of sale dated
February 10, 2005 was executed and delivered by Tustin to IMI USA, Inc., wherein pursuant to
the APA, Saturn Tustin has agreed to sell, transfer, convey, assign, and deliver the assets to IMI
or to its subsidiary designated by IMI.
*SGVMC108983*
-49 -
On December 12, 2005, IMI Singapore and STEL entered into a merger agreement by way of a
scheme arrangement. Under the scheme arrangement, all the issued shares of STEL will be
transferred to IMI Singapore. In consideration for such transfer, IMI Group will allot, issue
and/or pay, as the case may be either one of the following: (1) 1.3249 new IMI shares for each
share held by such entitled shareholder of STEL; (2) SGD0.5350 (US$0.3165 at the time of
purchase) in cash for each share held by such entitled shareholder; or (3) a combination of new
IMI shares and cash consideration in such proportion as elected by such entitled shareholder.
The scheme price was arrived at after negotiations between IMI Group and STEL on an arm’slength basis, taking into consideration, among other things, the historical market price of the
shares as well as the financial performance of STEL and the assessment of STEL’s future
prospects.
STEL has an authorized share capital of 500,000,000 ordinary shares, and issued and outstanding
376,200,000 shares with a par value of SGD0.0500 (US$0.2898) each. Out of the total
outstanding shares of STEL, 46,443,747 shares were purchased by IMI Group through share
swap. All the shares of STEL have been delisted and withdrawn from the Singapore Exchange
Securities Trading Limited at the time of the purchase. The total acquisition cost of STEL
amounted to $119,118,935 consisting of $104,419,154 in cash and 61,533,299 IMI shares worth
$14,699,781.
The estimated fair values of the identifiable assets and liabilities of STEL as at the date of
purchase follow:
Accounts and other receivables
Inventories
Investments
Property, plant and equipment
Total assets acquired
Accounts payable
Notes payable
Other liabilities
Deferred tax liability
Long-term debt
Total liabilities acquired
Estimated fair values of net assets acquired
Acquisition cost, net of cash acquired
Provisional value of goodwill
Increase in fair value of machines and equipment
Increase in fair value of intangible assets
Effect of change in functional currency
Adjusted goodwill at the time of acquisition
$39,675,221
24,090,992
13,041
38,197,302
101,976,556
(41,723,857)
(3,974,019)
(2,824,440)
(639,874)
(549,039)
(49,711,229)
52,265,327
113,030,535
60,765,208
(3,300,956)
(13,100,000)
763,772
$45,128,024
No income for 2005 was recorded from STEL since the business combination was completed only
in December 2005. If the combination had taken place at the beginning of the reporting year,
revenue from continuing operations would have been $359.1 million, and net income of IMI
Group would have been $38.0 million, before any adjustments for interest and other expenses
related to the acquisition.
*SGVMC108983*
-50 -
IMI Group has appointed an independent third party for the fair valuation of selected machinery
and equipment in relation to the business combination. Based on the asset valuation report dated
November 24, 2006, the result of the fair valuation of selected machinery and equipment are as
follows:
Fair values of selected machines and equipment
Recorded book values at the time of acquisition
Increase in the recorded book values
$24,935,956
21,635,000
$3,300,956
IMI Group also engaged an independent third party to identify and value the intangibles which
were part of the business combination. Based on the report of the independent third party, the fair
value of the intangible assets acquired from STEL as at December 12, 2005 are as follows:
Intangible Assets
Fair Value
$12,900,000
100,000
100,000
$13,100,000
Customer Relationships
Order Backlog
Unpatented Technology
The aggregate Goodwill recognized from these acquisitions amounted to $0.4 million in 2006 and
$45.8 million in 2005. The total cash outflows on these acquisitions, net of cash received,
aggregated to $0.5 million in 2006 and $106.0 million in 2005.
21. Income Taxes
The components of the Group’s deferred taxes as of December 31, 2006 and 2005 are as follows:
Net Deferred Tax Assets
2006
2005
(In Thousands)
Deferred tax assets on:
Allowance for probable losses
Unrealized gain, deposits and accruals for
various expenses on real estate transactions
Retirement benefits
NOLCO
MCIT
Others
Deferred tax liabilities on:
Capitalized customs duties, interest and other
expenses
Others
Net deferred tax assets
P
=687,949
P
=645,552
518,619
192,177
174,679
51,242
17,780
168,082
1,810,528
603,251
201,419
110,458
29,174
26,221
179,476
1,795,551
(686,616)
–
(686,616)
P
=1,123,912
(681,999)
(145)
(682,144)
P
=1,113,407
*SGVMC108983*
-51 -
Net Deferred Tax Liabilities
2006
2005
(In Thousands)
Deferred tax assets on:
Unrealized gain, deposits and accruals for
various expenses on real estate transactions
NOLCO
Others
Deferred tax liabilities on:
Excess of financial realized gross profit over
taxable realized gross profit
Capitalized customs duties, interest and other
expenses
Others
Net deferred tax liabilities
P
=58,070
47,967
25,835
131,872
P
=75,273
7,260
17,069
99,602
244,113
237,202
290,728
40,767
575,608
(P
=443,736)
101,311
72,980
411,493
(P
=311,891)
The Group has NOLCO amounting to P
=8.8 billion and P
=7.8 billion in 2006 and 2005,
respectively, which were not recognized. Further, deferred tax assets from the excess MCIT over
regular corporate income tax amounting to P
from unrealized gain on real estate sales amounting to P
=4.8 million and P
=143.3 million as of
December 31, 2006 and 2005, respectively, were also not recognized. Deferred tax assets are
recognized only to the extent that taxable income will be available against which the deferred tax
assets can be used. The Group will recognize a previously unrecognized deferred tax asset to the
extent that it becomes probable that future taxable income will allow the deferred tax asset to be
recovered.
As of December 31, 2006, NOLCO and MCIT that can be claimed as deduction from future
taxable income or used as deductions against income tax liabilities are as follows:
Year incurred
Expiry date
2004
2005
2006
2007
2008
2009
NOLCO
MCIT
(In Thousands)
=2,971,437
P
=17,440
P
3,120,245
16,620
3,004,989
15,449
=9,096,671
P
=49,509
P
At December 31, 2006 and 2005, deferred tax liabilities have not been recognized on the
undistributed earnings and cumulative translation adjustment of foreign subsidiaries, associates
and joint ventures since the timing of the reversal of the temporary difference can be controlled
by the Group and management does not expect the reversal of such temporary difference in the
foreseeable future. Such undistributed earnings and cumulative translation adjustment amounted
to P
=1,361.0 million as of December 31, 2006 and 2005, respectively.
There are no income tax consequences attaching to the payment of dividends by the domestic
subsidiaries, associates and joint ventures to the Company.
*SGVMC108983*
-52 -
Republic Act (RA) No. 9337
RA No. 9337 was recently enacted into law amending various provisions in the existing 1997
National Internal Revenue Code. Among the reforms introduced by the said RA, which became
effective on November 1, 2005, are as follows:
•
•
•
•
•
Increase in the corporate income tax rate from 32% to 35% with a reduction thereof to 30%
beginning January 1, 2009;
Increase in value added tax (VAT) rate from 10% to 12%, effective February 1, 2006 as
authorized by the Philippine president pursuant to the recommendation of the Secretary of
Finance;
Revised invoicing and reporting requirements for VAT;
Expanded scope of transactions subject to VAT; and
Provided thresholds and limitations on the amounts of VAT credits that can be claimed.
Provision for income tax consists of:
2006
Current
Deferred
P
=1,764,984
112,175
P
=1,877,159
2005
2004
(In Thousands)
=1,696,400
P
P1,183,233
=
(857,122)
211,249
=839,278
P
=1,394,482
P
The reconciliation between the statutory and the effective income tax rates follows:
Statutory income tax rate
Tax effect of:
Nontaxable equity in net earnings of
associates and joint ventures
Gain on sale of shares and capital
gains tax
Income under income tax holiday
Effect of change in statutory tax rate
Interest income subjected to final tax
at lower rates
Others
Effective income tax rate
2006
35.00%
2005
32.50%
2004
32.00%
(17.84)
(24.69)
(24.64)
(13.98)
0.16
–
(14.41)
(4.23)
(1.04)
(7.37)
(0.04)
–
(1.15)
9.40
11.59%
(0.64)
20.28
7.77%
(0.39)
14.51
14.07%
*SGVMC108983*
-53 -
22. Earnings Per Share
The following table presents information necessary to calculate EPS on net income attributable to
equity holders to the Company:
2005
2004
=8,198,004
P
=7,353,022
P
P
=12,176,771
274,276
–
–
8,198,004
7,353,022
11,902,495
343,381
342,966
344,204
1,390
1,681
1,691
2006
Net income
Less dividends on preferred stock
Basic EPS
Diluted EPS
345,895
P
=34.58
P
=34.41
344,771
=23.87
P
=23.78
P
344,647
=21.44
P
=21.33
P
EPS on income before income associated with noncurrent assets held for sale attributable to
equity holders of the Company:
2006
Income before income associated with
Less: Income before income associated with
noncurrent assets held for sale associated
to minority interests
Less: Dividends on preferred stock
for basic EPS
Basic EPS
Diluted EPS
2005
2004
P
=14,312,367
=9,959,445
P
=8,504,844
P
2,182,173
274,276
11,855,918
1,800,645
–
8,158,800
1,181,991
–
7,322,853
344,204
1,691
343,381
1,390
342,966
1,681
345,895
P
=34.44
P
=34.28
344,771
=23.76
P
=23.66
P
344,647
=21.35
P
=21.25
P
Weighted average number of common shares outstanding and EPS for 2004 has been restated to
reflect the 50-to-1 reverse stock split in 2005 (see Note 18).
23. Retirement Plan
The Company and certain subsidiaries have their respective funded, noncontributory tax-qualified
defined benefit type of retirement plans covering substantially all of their employees. The
benefits are based on defined formula with minimum lump-sum guarantee of 1.5 months’
effective salary per year of service. The consolidated retirement costs charged to operations
amounted to
=319.5 million in 2006, P
P
=463.3 million in 2004.
*SGVMC108983*
-54 -
Based on the latest actuarial valuation reports of the Company and certain subsidiaries, the
aggregate actuarial present value of pension benefits amounted to P
=4,013 million. The aggregate
fair value of their respective plan assets amounted to P
=3,267 million. The principal actuarial
assumptions used to determine the pension benefits with respect to the discount rate, salary
increases and return on plan assets were based on historical and projected normal rates. The
Company’s and certain subsidiaries’ annual contributions to their respective plans consist of
payments covering the current service cost for the year and the required funding relative to the
guaranteed minimum benefits as applicable.
The components of pension expense (included in Personnel costs under “General and
administrative expenses”) in the consolidated statements of income are as follows:
2006
Current service cost
Interest cost on benefit obligation
Expected return on plan assets
Net actuarial loss (gain)
Past service cost
Effect of ceiling limit
Total retirement expense
Actual return on plan assets
P
=239,923
240,125
(163,718)
4,362
1,466
(2,642)
P
=319,516
P
=295,694
2005
(In Thousands)
=356,998
P
180,617
(84,858)
(8,264)
2,706
–
=447,199
P
=110,636
P
2004
=339,229
P
173,930
(50,409)
521
–
–
=463,271
P
=57,723
P
The funded status and amounts recognized in the consolidated balance sheets for the pension plan
assets of subsidiaries in a net pension asset position as of December 31, 2006 and 2005 are as
follows:
Benefit obligation
Plan assets
Unrecognized net actuarial losses (gains)
Effect of ceiling limit
Asset recognized in the consolidated balance sheets
2005
2006
(In Thousands)
(P
=415,254)
(P
=778,671)
707,506
782,711
292,252
4,040
(55,903)
198,614
–
(56)
P
=236,349
P
=202,598
The funded status and amounts recognized in the consolidated balance sheets for the pension plan
liabilities of the Company and subsidiaries in a net pension liability position as of December 31,
2006 and 2005 are as follows:
Benefit obligation
Plan assets
Unrecognized net actuarial losses (gains)
Liabilities recognized in the consolidated
balance sheets
2005
2006
(In Thousands)
(P
=2,610,811)
(P
=3,233,979)
2,202,530
2,484,639
(408,281)
(749,340)
(25,303)
261,614
(P
=487,726)
(P
=433,584)
*SGVMC108983*
-55 -
Changes in the present value of the combined defined benefit obligation are as follows:
2005
2006
(In Thousands)
P
=2,458,164
P
=3,026,065
180,617
240,125
356,998
239,923
(99,154)
(170,833)
126,734
675,904
2,706
1,466
P
=3,026,065
P
=4,012,650
Balance at January 1
Interest cost on benefit obligation
Current service cost
Benefits paid
Actuarial losses on obligations
Past service cost
Balance at December 31
Changes in the fair value of the combined plan assets are as follows:
2005
2006
(In Thousands)
P
=1,775,607
P
=2,910,036
84,858
163,718
1,122,947
234,321
(99,154)
(170,833)
25,778
130,108
P
=2,910,036
P
=3,267,350
Balance at January 1
Expected return
Contributions by employer
Benefits paid
Actuarial gains on plan assets
Balance at December 31
The assumptions used to determine pension benefits for the Group are as follows:
2006
7.0 to 11.9%
5.0 to 10.0%
7.0 to 10.0%
Discount rate
Salary increase rate
Expected rate of return on plan assets
2005
11.0 to 14.5%
6.0 to 10.0%
3.3 to 10.0%
The allocation of the fair value of plan assets of the Group follows:
2006
61%
35%
4%
Investments in debt securities
Investments in equity securities
Others
2005
70%
25%
5%
Amounts for the current and previous annual periods are as follows:
2006
Defined benefit obligation
Plan assets
Deficit
Experience adjustment on plan liabilities
Experience adjustment on plan assets
(P
=4,012,650)
3,267,350
(745,300)
41,750
131,786
2005
2004
(In Thousands)
(P
=3,026,065)
(P
=2,458,164)
2,910,036
1,775,607
(116,029)
(682,557)
*SGVMC108983*
-56 -
The Company expects to contribute P
=50.0 million to its defined benefit pension plan in 2007.
As of December 31, 2006 and 2005, the plan assets include shares of stock of the Company with
total fair value of P
=764.6 million and P
=438.2 million, respectively.
The overall expected rate of return on assets is determined based on the market prices prevailing
on that date.
24. Share-based Payments
The Company has stock option plans for the granting of nontransferable options to key officers
(Executive Stock Option Plan - ESOP) whereby they are granted an option to purchase a fixed
number of shares of stock at a stated price during a specified period.
Under the ESOP, the qualified officers and employees may exercise in whole or in part their
vested option in accordance with the vesting percentage and vesting schedule stated in the plan.
These options are settled in equity once exercised. Also, to exercise their vested option, the
officers and employees are required to continue employment with the Company during the 10year option period. The Company granted stock options yearly from 2001 to 2005.
A summary of the Company’s stock option activity and related information for the years ended
December 31, 2006, 2005 and 2004 (as adjusted for the 2005 reverse stock split) follows:
Outstanding, at beginning of year
Granted
Exercised
Cancelled
Adjustment due to 20% stock
dividends (see Note 18)
Outstanding, at end of year
2006
Weighted
Average
Number
Exercise
of Shares
Price
3,785,816
P
= 202.56
–
–
(1,251,908)
(197.35)
–
–
–
2,533,908
–
P
= 205.13
2005
Weighted
Average
Number
Exercise
of Shares
Price
4,400,110
=203.90
P
31,530
295.00
(645,819)
(212.14)
(5)
–
2004
Weighted
Average
Number
Exercise
of Shares
Price
3,534,225
=
P241.31
1,141,499
220.00
(916,610)
(213.00)
(44,044)
(220.86)
–
3,785,816
685,040
4,400,110
–
=202.56
P
–
=
P203.90
The options have a contractual term of 10 years. As of December 31, 2006 and 2005, the
weighted average remaining contractual life of options outstanding is 6.3 years and 7.2 years,
respectively, and the range of exercise prices amounted from P
=154.50 to P
=295.00.
*SGVMC108983*
-57 -
The fair value of each option is estimated on the date of grant using the Black-Scholes optionpricing model. The fair values of stock options granted under ESOP at each grant date and the
assumptions used to determine the fair value of the stock options are as follows:
Weighted average share price
Exercise price
Expected volatility
Option life
Expected dividends
Risk-free interest rate
June 30, 2005
P
=327.50
P
=295.00
46.78%
10 years
1.27%
12.03%
June 10, 2004
P
=244.00
P
=220.00
46.71%
10 years
1.43%
12.75%
The Company also has Employee Stock Ownership Plan (ESOWN) granted to qualified officers
and employees wherein grantees may subscribe in whole or in part to the shares awarded to them
based on the 10% discounted market price as offer price set at grant date. The qualified
employees shall pay for the shares subscribed through installments over a maximum period of ten
years. The shares of stock have a holding period of one to three years and the employees must
remain with the Company or its subsidiaries over such period. The plan also does not allow sale
or assignment of shares during the holding period. Shares granted under the ESOWN follows:
Granted
Subscribed
Exercise price
2006
772,227
767,955
P
=320.00
2005
752,510
708,346
P
=269.55
Subscriptions receivable from the stock option plans covering the Company’s shares are presented
under equity.
Total expense arising from share-based payments recognized by the Group in the consolidated
statements of income amounted to P
=257.4 million in 2004.
P
25. Segment Information
Business segment information is reported on the basis that is used internally for evaluating
segment performance and deciding how to allocate resources among operating segments.
Accordingly, the primary segment reporting format is business segment. Secondary information
is reported geographically.
The industry segments where the Group operates are as follows:
•
Real estate and hotels - planning and development of large-scale fully integrated residential
and commercial communities; development and sale of residential and commercial lots and
the development and leasing of retail and office space and land in these communities;
construction and sale of residential condominiums and office buildings; development of
industrial and business parks; development and sale of upper middle-income and affordable
housing; strategic land bank management; hotel, cinema and theater operations; and
construction and property management.
*SGVMC108983*
-58 -
•
Financial services - universal banking operations, including savings and time deposits in local
and foreign currencies; commercial, consumer, mortgage and agribusiness loans; leasing;
payment services, including card products, fund transfers, international trade settlement and
remittances from overseas workers; trust and investment services including portfolio
management, unit funds, trust administration and estate planning; fully integrated
bancassurance operations, including life, non-life, pre-need and reinsurance services; internet
banking; on-line stock trading; corporate finance and consulting services; foreign exchange
and securities dealing; and safety deposit facilities.
•
Telecommunications - provider of digital wireless communications services, wireline voice
and wireline data communication services, and interexchange carrier services.
•
Electronics, information technology and business process outsourcing services manufacturing and other related services for electronic products and components; venture
capital for technology businesses; provision of value-added content for wireless services,
on-line business-to-business and business-to-consumer services; electronic commerce; and
technology infrastructure sales and technology services; and onshore- and offshore- business
process outsourcing services.
•
Water utilities - contractor to manage, operate, repair, decommission, and refurbish all fixed
and movable assets (except certain retained assets) required to provide water delivery services
and sewerage services in the East Zone Service Area.
•
Automotive - manufacture and sale of passenger cars and commercial vehicles.
•
International - investments in overseas property companies and projects.
•
Others - air-charter services, food, agri-business and others.
The Group generally accounts for inter-segment sales and transfers as if the sales or transfers
were to third parties at current market prices.
Business Segments
The following tables present information regarding the Group’s business segments.
Investment Properties and
Depreciation and
Property and Equipment
Amortization
Additions
2005
2005
2006
2006
(In Millions)
Parent Company/Financial services/
Telecommunications/Water utilities
Electronics, Information Technology and Business Process
Outsourcing Services
International
Automotive and Others
P
=92
1,402
=203
P
930
P
=68
2,263
=109
P
1,923
1,013
4
79
P
=2,590
477
2
103
=1,715
P
1,523
3
144
P
=4,001
2,922
180
62
=5,196
P
*SGVMC108983*
-59 -
Investments in Associates
and Joint Ventures
2005
2006
Electronics, Information Technology and
Business Process Outsourcing Services
International
Deferred Tax Assets/Liabilities
Segment Assets
2005
2006
(In Millions)
Segment Liabilities
2005
2006
P
=55,598
8,791
=53,035
P
6,812
P
=72,762
79,477
=72,763
P
72,754
P
=40,386
30,410
=49,732
P
25,973
200
3,614
366
–
P
=68,569
188
3,408
365
–
=63,808
P
19,590
7,375
2,004
1,124
P
=182,332
14,100
5,364
1,752
1,113
=167,846
P
8,180
471
607
444
P
=80,498
8,212
388
446
312
=85,063
P
2006
International
Revenue
2005
(In Millions)
2004
P
=13,742
25,808
=10,301
P
21,369
=10,808
P
17,590
20,953
439
9,224
P
=70,166
10,437
462
7,974
=50,543
P
739
6,539
8,047
=43,723
P
Equity in Net Income of Associates and
Noncash Expenses Other Than
Joint Ventures
Depreciation and Amortization
2005
2004
2005
2004
2006
2006
(In Millions)
Telecommunications/Water utilities*
International
P
=7,930
291
=8,043
P
176
=7,702
P
176
P
=311
236
=384
P
2,184
(62)
(329)
154
(25)
72
45
74
19
48
–
–
–
1
9
–
=8,202
P
=7,623
P
=2,742
P
P
=8,253
P
=619
* Equity in net income of financial services, telecommunications and water utilities amounted to =
P3,300 million, =
P4,109 million,
and P
=588 million in 2006, respectively; P
=3,026 million, =
P3,616 and =
P1,438 million in 2005, respectively; and P
=2,363 million,
=4,404 million and =
P
P858 million in 2004, respectively.
Income before income associated with
2005
2004
2006
2006
(In Millions)
Real Estate and Hotels**
International
Net Income
2005
=–
P
–
23
–
1
=24
P
2004
P
=8,044
4,129
=4,093
P
4,056
=3,836
P
2,880
P
=8,044
4,285
=4,093
P
4,187
=3,836
P
2,981
1,697
220
222
P
=14,312
1,104
228
478
=9,959
P
1,275
323
191
=8,505
P
1,667
250
222
P
=14,468
1,067
265
478
=10,090
P
1,222
375
191
=8,605
P
** Operations associated with noncurrent assets held for sale belong to Real Estate and Hotels segment.
Summarized financial information of BPI, Globe and MWCI are presented in Note 8.
*SGVMC108983*
-60 -
Geographical Segments
Philippines
USA
Europe
Japan
Others (Mostly Asia)
2006
Revenue
2005
P
=49,122
4,801
3,150
10,649
2,444
P
=70,166
=39,945
P
2,040
536
7,933
89
=50,543
P
Segment Assets
2005
2006
(In Millions)
=152,685
P
P
=160,795
2,431
9,088
–
–
–
–
12,730
12,449
=167,846
P
P
=182,332
Investment Properties and
Property and
Equipment Additions
2005
2006
P
=3,229
272
–
–
500
P
=4,001
=2,926
P
277
–
–
1,993
=5,196
P
26. Leases
Finance leases - as lessee
Foreign subsidiaries conduct a portion of their operations from leased facilities, which include
office equipment. These leases are classified as finance leases and expire over the next 5 years.
The average discount rate implicit in the lease is 8.5% per annum in 2005 and 2004. Future
minimum lease payments under the finance leases together with the present value of the net
minimum lease payments are as follows:
Within one year
After one year but not more than five years
Total minimum lease payments
Less amounts representing finance charges
Present value of minimum lease payments
2005
2006
Minimum Present values
Minimum Present values
payments
of payments
payments
of payments
(In Thousands)
=6,305
P
=
P6,269
P
=6,054
P
=6,021
8,254
8,201
2,207
2,183
14,559
14,470
8,261
8,204
1,974
–
708
–
=12,585
P
=
P14,470
P
=7,553
P
=8,204
Operating lease commitments - as lessee
Future minimum rentals payable under non-cancellable operating leases of lessee subsidiaries are
as follows:
Within one year
After one year but not more than five years
More than five years
2005
2006
(In Thousands)
P
=110,556
P
=105,956
549,653
523,576
1,830,166
1,516,421
P
=2,490,375
P
=2,145,953
Operating leases - as lessor
Certain subsidiaries have lease agreements with third parties covering real estate properties.
These leases generally provide for either (a) fixed monthly rent, or (b) minimum rent or a certain
percentage of gross revenue, whichever is higher.
*SGVMC108983*
-61 -
27. Related Party Transactions
The Group, in their regular conduct of business, have entered into transactions with associates,
joint ventures and other related parties principally consisting of advances and reimbursement of
expenses, purchase and sale of real estate properties, various guarantees, construction contracts,
and development, management, underwriting, marketing and administrative service agreements.
Sales and purchases of goods and services to and from related parties are made at normal market
prices.
2006
Income
Associates and Joint Ventures
Key management personnel
Other related parties
P
=619,858
–
12,567
P
=632,425
Amounts
Owed by
Costs and
Related
Expenses
Parties
(In Thousands)
P
=6,374,376
P
=1,391,917
767,588
254,288
61,956
1,551,445
P
=7,203,920
P
=3,197,650
Amounts
Owed to
Related
Parties
P
=47,187
–
85,017
P
=132,204
2005
Income
=575,676
P
–
205,863
=781,539
P
Amounts
Owed by
Costs and
Related
Expenses
Parties
(In Thousands)
=3,980,618
P
=774,680
P
583,174
212,444
147,800
1,166,086
=4,711,592
P
=2,153,210
P
Amounts
Owed to
Related
Parties
=55,174
P
–
142,238
=197,412
P
2004
Income
=470,394
P
–
96,086
=566,480
P
Amounts
Owed by
Costs and
Related
Expenses
Parties
(In Thousands)
=6,138,034
P
=734,423
P
507,519
258,518
16,150
379,354
=6,661,703
P
=1,372,295
P
Amounts
Owed to
Related
Parties
=90,062
P
–
226,795
=316,857
P
Amounts owed by related parties include promissory notes issued by Bonifacio Land Corporation
(BLC), which were assigned by Metro Pacific Corporation (MPC) to ALI and Evergreen Holdings
Inc. (EHI) and the advances subsequently made by ALI to Fort Bonifacio Development
Corporation (FBDC) to fund the completion of the Bonifacio Ridge project and to BLC to finance
the costs to be incurred in relation to its restructuring program. These notes and advances are due
and demandable and bear interest at the rate of 12% to 14% per annum.
*SGVMC108983*
-62 -
Allowance for doubtful accounts to related parties amounted to P
=111.4 million and P
=3.1 million
as of December 31, 2006 and 2005, respectively. Provision for doubtful accounts amounted to
P
=219.0 million in 2004.
Compensation of key management personnel by benefit type follows:
2006
Short-term employee benefits
Share-based payments (see Note 24)
Post-employment benefits
P
=500,413
182,877
84,298
P
=767,588
2005
(In Thousands)
=327,584
P
148,033
107,557
=583,174
P
2004
=281,480
P
112,051
113,988
=507,519
P
There are no agreements between the Company and any of its directors and key officers providing
for benefits upon termination of employment, except for such benefits to which they may be
entitled under the Company’s retirement plan.
28. Financial Instruments
Financial Risk Management Objectives and Policies
The Group’s principal financial instruments comprise of financial assets at FVPL, AFS financial
assets, HTM investments, bank loans, corporate notes and bonds. The financial debt instruments
were issued primarily to raise financing for the Group’s operations. The Group has various
financial assets such as cash and cash equivalents, accounts and notes receivables and accounts
payable and accrued expenses which arise directly from its operations.
The main purpose of the Group’s financial instruments is to fund its operational and capital
expenditures. The main risks arising from the use of financial instruments are interest rate risk,
foreign exchange risk, liquidity risk and credit risk. The Group also enters into derivative
transactions, the purpose of which is to manage the currency and interest rate risk arising from its
financial instruments.
The Group’s risk management policies are summarized below:
Interest Rate Risk
The Group’s exposure to market risk for changes in interest rates relates primarily to the
Company’s and its subsidiaries’ long-term debt obligations. The Group’s policy is to manage its
interest cost using a mix of fixed and variable rate debt.
Foreign Exchange Risk
The Group’s foreign exchange risk results primarily from movements of the Philippine Peso
(PHP) against the United States Dollar (USD). As of December 31, 2005, 31% of debt of the
Group was denominated in foreign currency. The Company enters into foreign currency forwards
and foreign currency swap contracts in order to hedge its USD obligations.
*SGVMC108983*
-63 -
Liquidity Risk
The Group seeks to manage its liquidity profile to be able to service its maturing debts and to
finance capital requirements. The Group maintains a level of cash and cash equivalents deemed
sufficient to finance operations. As part of its liquidity risk management, the Company regularly
evaluates its projected and actual cash flows. It also continuously assesses conditions in the
financial markets for opportunities to pursue fund-raising activities. Fund-raising activities may
include bank loans and capital market issues both on-shore and off-shore.
Credit Risk
The Group’s holding of cash and short-term investments exposes the Group to credit risk of the
counterparty. Credit risk management involves dealing only with institutions for which credit
limits have been established. The treasury policy sets credit limits for each counterparty. Given
the Group’s diverse base of counterparties, it is not exposed to large contractions of credit risk.
Hedging Objectives and Policies
The Group uses a combination of natural hedges and derivative hedging to manage its foreign
exchange exposure and interest rate exposure.
Financial Assets and Liabilities
Fair Value of Financial Instruments
The table below presents a comparison by category of carrying amounts and estimated fair values
of all of the Group’s financial instruments:
Carrying Value
Fair Value
2005
2005
2006
2006
(In Thousands)
Current Financial Assets
Cash and cash equivalents
Short-term investments (included in other
current assets)
Total current financial assets
Noncurrent Financial Assets
Investment in AFS financial assets (included
in investment in bonds and other securities)
HTM investments (included in investment in
bonds and other securities)
Total noncurrent financial assets
Current Financial Liabilities
Forward currency contracts (included in
other current liabilities)
Short-term debt
Other Current Liabilities
Current portion of:
Long-term debt
Cumulative redeemable preferred shares
Total current financial liabilities
P
=23,118,432
17,469,560
=24,010,827
P
11,308,085
P
=23,118,432
17,469,560
=
P24,010,827
11,308,085
2,302,694
42,890,686
852,309
36,171,221
2,302,694
42,890,686
852,309
36,171,221
2,519,816
5,631,132
2,982,209
6,260,109
3,334,860
1,972,131
3,334,860
1,972,131
127,575
5,982,251
100,836
7,704,099
140,995
6,458,064
110,183
8,342,423
18,325,716
17,311,245
18,325,716
17,311,245
–
2,504,007
165,113
38,877
6,154,405
40,781
–
2,504,007
165,113
38,877
6,154,405
40,781
9,359,594
–
30,354,430
2,985,240
2,230,000
28,760,548
9,359,594
–
30,354,430
2,985,240
2,230,000
28,760,548
(Forward)
*SGVMC108983*
-64 -
Carrying Value
Fair Value
2005
2005
2006
2006
(In Thousands)
Noncurrent Financial Liabilities
Deposits and retentions payable (included
under other noncurrent liabilities)
Long-term debt
Cumulative redeemable preferred shares
Total noncurrent financial liabilities
P
= 3,904,494
38,517,839
2,500,000
P
=44,922,333
P3,508,308
=
46,507,287
2,500,000
=52,515,595
P
P
=3,898,818
42,613,956
2,790,743
P
=49,303,517
=
P3,280,546
49,436,012
2,421,167
=
P55,137,725
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate such value:
Cash and cash equivalents, accounts and notes receivable, accounts payable and accrued
expenses - Carrying amounts approximate fair values due to the relative short-term maturities of
these investments and liabilities.
Short-term investments - These include are investments in government securities and TRG fund
(see Note 7). Fair value is based on quoted prices and hypothetical valuation using cash flows
and views in the market, respectively. Changes in market perception and to underlying cash
flows will materially change these estimates.
Noncurrent accounts and notes receivable - The fair values are based on the discounted value of
future cash flows using the applicable rates for similar types of instruments. The discount rate
used ranged from 5.0% to 6.7%.
AFS quoted equity shares - Fair values are based on quoted prices published in markets.
AFS unquoted shares - Carrying amounts (cost less allowance for impairment losses) approximate
fair value due to the unpredictable nature or future cash flows and the lack of suitable methods of
arriving at a reliable fair value.
HTM investments - The fair value of bonds is based on quoted market prices.
Liabilities - The fair value of unquoted instruments are estimated using the discounted cash flow
methodology using the current incremental borrowing rates for similar borrowings with maturities
consistent with those remaining for the liability being valued. The discount rate used ranged from
5.0% to 6.7%.
The fair values of cumulative redeemable preferred shares, deposits and retentions payable, and
other fixed rate interest-bearing loans are based on the discounted value of future cash flows using
the applicable rates for similar types of loans. The discount rates used range from 6.4% to 9.7%
(for PHP loans) and 4.4% to 4.9% (for USD loans).
For variable rate loans that reprice every three months, the carrying value approximates the fair
value because of recent and regular repricing based on current market rates.
The fair value of forward currency contracts is based on counterparty valuation except for
forward transactions with a nonbank counterparty where valuation was calculated by reference to
currency forward exchange rates for contracts with similar maturity profiles.
*SGVMC108983*
-65 -
Foreign exchange and interest rate risks
The foreign currency-denominated assets and liabilities expressed in US dollars and their peso
equivalents as of December 31, 2006 and 2005 are as follows:
2005
2006
US Dollar
Assets:
Current
Noncurrent
Liabilities:
Current
Noncurrent
Net foreign currency denominated assets
(In Thousands)
Peso
US Dollar
Equivalent
Peso
Equivalent
$298,923
87,851
386,774
P
=14,669,394
4,308,601
18,977,995
$434,534
218,836
653,370
=
P23,060,500
12,415,506
35,476,006
153,856
229,446
383,302
7,562,225
11,270,099
18,832,324
184,215
320,151
504,366
9,779,087
16,987,935
26,767,022
$3,472
P
=145,671
$149,004
=
P8,708,984
The Company has outstanding short-term forward buy US dollar, sell Philippine peso exchange
contracts with aggregate notional amount of US$21.2 million as of December 31, 2005, and a
weighted average forward rate of P
=55.30 to US$1.
The Company has no outstanding swaps as of December 31, 2006.
*SGVMC108983*
-66 -
Interest rate risks
The following table shows information about the Group’s financial instruments that are exposed to interest rate risk and presented by
maturity profile. The table also sets out information about the Group’s derivative instruments as of December 31, 2006 and 2005 that
were entered into to manage interest and foreign exchange risks (in thousands).
2006
<1 year
Liabilities:
Long-Term Debt
Fixed Rate
US$ Notes
Interest rate
Philippine peso
Interest rate
Floating Rate
US$ Notes
Interest rate
Philippine peso
Interest rate
>1-<2 years
>2-<3 years
>3-<4 years
>4-<5 years
>5 years
$–
$136,740
8.13%
$–
$–
$–
$–
=1,185,100
P
8.25% - 12.00%
=2,999,820
P
10.60% - 10.75%
=7,472,856
P
5.00% - 12.68%
=3,140,912
P
8.25% - 12.00%
=2,147,258
P
7.25% - 12.00%
=5,930,000
P
7.25% - 14.88%
$86,102
3-6 month Libor
+ 0.80%; Libor
+2.40%;
15.00% per
annum, fixed for
3 years with
annual repricing
thereafter
$11,003
3-6 month Libor
+ 0.80%; 15.00%
per annum, fixed
for 3 years with
annual repricing
thereafter
$28,000
3-6 month Libor
+ 0.80%; Libor
+ (1.05% 2.40%)
$8,000
3-6 month Libor
+ 0.80%
$48,000
3-6 month Libor
+ (0.77% 0.80%)
$–
=4,550,349
P
3 month Mart 1
+ (0.50% 2.50%)
=1,886,829
P
3 month Mart 1 +
(0.50% - 2.50%)
=1,492,708
P
3 month Mart 1
+ (0.50% 2.50%)
=51,223
P
3 month Mart 1
+ (0.50% 2.50%)
=240,303
P
3 month Mart 1
+ (0.50% 2.50%)
=1,918,750
P
3 month Mart 1
+ (0.50% 2.50%)
Total
(In USD)
Total
(In PHP)
Fair Value
$136,740
=6,706,393
P
=7,053,696
P
22,875,946
26,624,760
8,154,932
8,154,932
10,140,162
10,140,162
=47,877,433
P
=51,973,550
P
$181,105
*SGVMC108983*
-67 2005
<1 year
Liabilities:
Long-Term Debt
Fixed Rate
US$ Notes
Interest rate
Philippine peso
Interest rate
Floating Rate
US$ Notes
Interest rate
Philippine peso
Interest rate
$2,828
8.55%
>1-<2 years
>2-<3 years
>3-<4 years
>4-<5 years
>5 years
$2,860
8.55%
$176,055
8.125% - 8.55%
$–
$–
$–
=152,591
P
=2,282,858
P
10.11% - 12.00% 10.11% - 12.00%
=2,987,783
P
10.11% - 12.00%
=723,711
P
10.11% - 14.5%
=40,236
P
10.38% - 12.00%
=14,948,399
P
10.00% 14.88%
$17,897
*; Libor +
2.40% margin;
3 month swap
offer rate +
1.25%
$25,897
*; Libor + 2.40%
margin; 3 month
swap offer rate +
1.25%
$114,312
*; Libor + 2.40%
margin; 3 month
swap offer rate +
1.25%
$–
$–
$–
=1,726,159
P
91 day T-bill +
(0.50% - 2.5%);
3 month Mart 1
+ (1.00% 1.90%); 15.00%
per annum,
fixed for 3 years
with annual
repricing
thereafter
=4,975,285
P
91 day T-bill +
(1.50% - 2.5%);
3 month Mart 1
+ (1.00.00% 2.00%); 15.00%
per annum, fixed
for 3 years with
annual repricing
thereafter
=1,876,325
P
3 month Mart 1
+ (1.25% 1.75%); 15.00%
per annum, fixed
for 3 years with
annual repricing
thereafter
=902,434
P
3 month Mart 1
+ 1.50%
=698,049
P
3 month Mart 1
+ 1.50%
=145,624
P
3 month Mart 1
+ 1.50%
Total
(In USD)
Total
(In PHP)
$181,743
=9,643,617
P
=10,622,006
P
21,135,578
23,085,914
8,389,456
8,389,456
10,323,876
10,323,876
=49,492,527
P
=52,421,252
P
$158,106
Fair Value
* Libor plus applicable margin
1. From Agreement date up to February 28, 2005 - 0.90%
2. 1.98% p.a. thereafter; provided that, if on an interest setting date after February 28, 2005,
a. the consolidated net debt of the Guarantor falls below US$400 million, then the applicable margin will be reduced to 1.90% p.a. or,
b. if the consolidated net debt of the Guarantor falls below US$300 million, then the applicable margin will be reduced to 1.80% p.a.
*SGVMC108983*
- 68 -
Freestanding Derivatives
The Company uses currency forward contracts and long-term foreign currency swap to manage
foreign currency risks arising from foreign-currency denominated obligations. These derivative
instruments provide economic hedges under the Company’s policies but are not designated as
accounting hedges. Changes in the fair values of derivative instruments not designated as hedges
are recognized immediately in the consolidated statements of income.
•
Forwards
The Company uses derivative financial instruments, particularly forward currency contracts to
hedge its risks associated with foreign currency fluctuations. As of December 31, 2005, the
Company has outstanding forward currency contracts aggregating to US$21.2 million with
mark-to-market loss recognized in the statements of income amounting to P
=38.9 million.
•
Cross-Currency Swap
The Company also entered into foreign currency swap agreements with certain banks and
related parties, under which it swaps the principal of US$ 30.0 million USD-denominated
loans into PHP. The swaps matured in January and May 2005 with a net realized gain
amounting to P
=215.4 million.
•
Interest Rate Swaps
The Company guaranteed a US$200.0 million fixed-to-floating interest rate swap with rate
collar of ACIFL which matured on January 17, 2005 with a net realized gain of P
=61.4 million.
As of December 31, 2006, the Company has no outstanding derivative contracts.
Fair Value Changes on Derivatives
The net movements in fair value changes of the Company’s derivative instruments (included in
“Other current liabilities” account) in 2005 are as follows (amounts in thousands):
Balance at beginning of year
Net changes in fair value of derivatives
not designated as accounting hedges
Fair value of settled instruments
Balance at end of year
Gain (Loss)
P
=173,308
(156,875)
16,433
(55,310)
(P
=38,877)
29. Registration with the Philippine Export Zone Authority (PEZA)
Some activities of certain subsidiaries are registered with the PEZA. Under the registration, these
subsidiaries are entitled to certain tax and nontax incentives, which include, but are not limited to,
income tax holiday (ITH) and duty-free importation of inventories and capital equipment. Upon
the expiration of the ITH, the subsidiaries will be liable for payment of a five percent (5%) tax on
gross income earned from sources within the PEZA economic zone in lieu of payment of national
and local taxes.
*SGVMC108983*
- 69 -
30. Note to Consolidated Statements of Cash Flows
Noncash investing activities are as follows:
2006
Property/liquidating dividend
Acquisitions through issuance of shares
of stock of a subsidiary
Land received in settlement of trade
accounts receivable
P
=16,573
2005
(In Thousands)
=–
P
2004
=–
P
–
776,985
–
–
–
4,442
31. Commitments and Contingencies
ALI has an existing contract with the Bases Conversion Development Authority (BCDA) to
develop, under a lease agreement a mall with an estimated gross leasable area of 152,000 square
meters on a 9.8-hectare lot inside Fort Bonifacio. The lease agreement covers 25 years,
renewable for another 25 years subject to reappraisal of the lot at market value. The annual fixed
lease rental amounts to P
=106.5 million while the variable rent ranges from 5% to 20% of gross
revenue. Subsequently, ALI transferred its rights and obligations granted to or imposed under the
lease agreement to SSECC, its subsidiary, in exchange for equity.
As part of the bid requirement, ALI procured a performance bond in 2003 from the Government
Service Insurance System in favor of BCDA amounting to P
=3.9 billion to guarantee the committed
capital to BCDA. Moreover, ALI obtained surety bonds to guarantee the payment of the fixed
and variable rent as prescribed in the lease agreement. The surety bonds are secured by a
mortgage on a property of a certain subsidiary with a carrying value of P
=48.6 million in 2004.
On April 15, 2003, ALI entered into a Joint Development Agreement (JDA) with BCDA for
development of another lot inside Fort Bonifacio with a gross area of 11.6 hectares for residential
purposes. Pursuant to the agreement, BCDA shall contribute all its title and interest to the lot and
ALI in turn shall provide the necessary cash and expertise to undertake and complete the
implementation of the residential development. ALI commits to invest sufficient capital to
complete the residential development.
ALI procured a surety bond with a face value of P
=122.9 million issued by an insurance company
in favor and for the benefit of BCDA as beneficiary. The surety bond shall be continuing in
nature and shall secure the obligation of ALI to pay BCDA annual minimum revenue share for
each of the first 8 selling periods of the residential project.
In 2002, ALI agreed to underwrite the subscription to NTDCC additional shares amounting to
=1.4 billion over a 4-year equity schedule up to 2007 in exchange for a 5% underwriting fee (net
P
of a 1.5% rebate to existing shareholders who subscribed).
*SGVMC108983*
- 70 -
The Company and certain subsidiaries are contingently liable for lawsuits or claims filed by third
parties which are either pending decision by the courts or being contested, the outcome of which
are not presently determinable. In the opinion of management and its legal counsel, the eventual
liability under these lawsuits or claims, if any, will not have a material or adverse effect on the
consolidated financial statements. The information usually required by PAS 37, Provisions,
Contingent Liabilities and Contingent Assets, is not disclosed on the grounds that it can be
expected to prejudice the outcome of these lawsuits, claims and assessments. No provisions were
made during the year.
*SGVMC108983*
SEC No.
File No. _____
AYALA CORPORATION
(Company’s Full Name)
Tower One, Ayala Triangle
Ayala Avenue, Makati City
(Company’s Address)
848-56-43
(Telephone Number)
June 30, 2007
(Quarter Ending)
(Month & Day)
SEC Form 17- Q Quarterly Report
(Form Type)
SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-Q
QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION
CODE (SRC) AND SRC RULE 17(2)(b) THEREUNDER
1.
For the quarterly period ended: June 30, 2007
2.
SEC Identification No.: 34218
3.
BIR Tax Identification No. 000-153-610-000
4.
Exact name of the registrant as specified in its charter: AYALA CORPORATION
5.
Province, country or other jurisdiction of incorporation or organization: Makati City,
Philippines
6.
Industry Classification Code: _______ (SEC Use Only)
7.
Address of principal office: 34 Floor, Tower One, Ayala Triangle, Ayala Avenue, Makati
City
Postal Code: 1226
8.
Registrant’s telephone number: (632) 848-5643
9.
Former name, former address, former fiscal year: Not applicable
10.
Securities registered pursuant to Sections 8 and 12 of the Code, or Sections 4 and 8 of the
RSA:
th
Title of each class
Preferred A *
Preferred B
Common
Number of shares outstanding
500,000,000
58,000,000
413,969,400
*Classified as liabilities in compliance with PAS 32, Financial Instruments: Disclosures
and Presentation
Amount of debt outstanding as of June 30, 2007: P47,082,844K including P2,500,000K
redeemable preferred shares.
11.
Are any of these securities listed on the Philippine Stock Exchange? Yes [x] No [ ]
12.
Check whether the registrant:
(a)
has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17
thereunder or Sections 11 of the RSA and RSA Rule 11 (a)-1 thereunder, and
Sections 26 and 141 of the Corporation Code of the Philippines, during the
preceding 12 months (or for such shorter period that the registrant was required to
file such reports): Yes [x] No [ ]
(b)
has been subject to such filing requirements for the past 90 days: Yes [x] No [ ]
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1
Item 2
Financial Statements
Consolidated Balance Sheets as of June 30, 2007
and December 31, 2006
1
Consolidated Statements of Income For the Periods
Ended June 30, 2007 and 2006
2
Consolidated Statements of Changes in Stockholders’ Equity
For the Periods Ended June 30, 2007 and 2006
3
Consolidated Statements of Cash Flow for the Periods
Ended June 30, 2007 and 2006
4
Notes to Consolidated Financial Statements
5
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
PART II – OTHER INFORMATION
SIGNATURES
13
19
PART I – FINANCIAL INFORMATION
Item I – Financial Statements
CONSOLIDATED BALANCE SHEETS
As of June 30, 2007 and December 31, 2006
Unaudited
Audited
June 30, 2007 December 31, 2006
ASSETS
Current Assets
Cash and cash equivalents (Note 2)
Accounts and notes receivable - net (Note 3)
Inventories (Note 4)
Noncurrent assets held for sale
Noncurrent Assets
Noncurrent accounts and notes receivable
Land and improvements - net
Investments in associates and joint ventures - net
Investments in bonds and other securities (Note 5)
Investment properties - net
Deferred tax assets - net
Pension assets
Intangible assets - net
Total Noncurrent Assets
Total Assets
32,389,919
17,694,287
9,260,779
3,014,331
62,359,316
62,359,316
23,118,432
17,469,560
9,803,922
3,961,315
54,353,229
3,658,484
58,011,713
3,891,045
16,188,799
69,513,446
5,188,998
16,347,291
9,096,354
1,149,271
187,521
4,205,661
2,088,941
127,857,327
190,216,643
2,519,816
16,174,984
68,568,683
3,462,435
16,794,662
9,057,075
1,123,912
202,598
4,630,652
1,785,374
124,320,191
182,331,904
19,195,689
2,716,235
341,167
8,127,373
2,773,623
33,154,087
33,154,087
18,325,716
2,504,007
295,846
9,359,594
1,453,013
31,938,176
469,100
32,407,276
33,739,236
2,500,000
319,708
485,914
7,010,886
44,055,744
77,209,831
38,517,839
2,500,000
443,736
487,726
6,141,065
48,090,366
80,497,642
26,613,687
(1,329,628)
575,845
2,387,537
57,768,835
(310)
86,015,966
26,990,846
113,006,812
190,216,643
23,137,948
(298,310)
558,416
2,078,522
51,659,261
(310)
77,135,527
24,698,735
101,834,262
182,331,904
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued expenses (Note 6)
Short-term debt (Note 7)
Income tax payable
Current portion of long-term debt
Other current liabilities (Note 8)
Total Current Liabilities
Liabilities directly associated with noncurrent assets held for sale
Noncurrent Liabilities
Long-term debt - net of current portion (Note 7)
Cumulative redeemable preferred shares-net of current portion
Deferred tax liabilities
Pension liabilities
Other noncurrent liabilities (Note 8)
Total Noncurrent Liabilities
Total Liabilities
Equity
Paid-up capital (Note 9)
Cumulative translation adjustment
Unrealized gain on available -for-sale-investments
Retained earnings
Treasury stock
Minority Interest
Total Equity
Total Liabilities and Equity
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 1
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months Ended June 30, 2007 and June 30, 2006
(In Thousand Pesos)
2007
April to June
Jan. to June
INCOME
Sales and Services
Equity in net earnings of associates and joint ventures
Interest, fees, rental, investment and other income
COSTS AND EXPENSES
General and administrative
Interest and other charges
NET INCOME
ATTRIBUTABLE TO:
Minority interest
EARNINGS PER SHARE (Note 10)
Basic
Diluted
2006
April to June
Jan. to June
13,805,030
2,531,639
4,269,487
20,606,156
27,074,612
4,871,262
9,061,359
41,007,233
14,906,385
1,703,689
3,306,858
19,916,932
26,251,487
4,128,432
5,335,804
35,715,723
10,592,759
2,191,590
1,062,880
387,776
14,235,005
20,711,311
4,196,009
2,269,754
1,037,979
28,215,053
11,550,254
1,920,708
1,253,566
568,793
15,293,321
20,070,167
3,516,014
2,617,611
1,107,793
27,311,585
6,371,151
12,792,180
4,623,611
8,404,138
5,848,896
522,255
6,371,151
11,491,080
1,301,100
12,792,180
4,170,602
453,009
4,623,611
7,310,119
1,094,019
8,404,138
27.10
26.97
17.73
17.64
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 2
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in thousands)
Paid-up Capital
(Note 16)
Share-based
Payments
Adjustments to foreign currency translation
Changes in fair value of available-for-sale investments
Increase in share-based payments
Net income for the period
Dividends on common shares
Balances of June 30, 2007
23,137,948
24,372
3,451,367
26,613,687
558,416
17,429
575,845
Adjustments to foreign currency translation
Changes in fair value of available-for-sale investments
Increase in share-based payments
Adjustments during the period
Net income for the period
Dividends on common shares
Increase in minority interest
Balances of June 30, 2006
16,959,696
106,071
17,065,767
655,754
51,535
707,289
Cumulative
Translation
Adjusments
(298,310)
(1,031,318)
(1,329,628)
687,724
151,975
839,699
Retained
Earnings
51,659,261
11,491,080
(1,930,139)
(3,451,367)
57,768,835
42,513,384
7,310,119
(2,066,917)
47,756,586
Net Unrealized
gain on
Available for
Sale-Financial
Assets
2,078,522
309,015
2,387,537
477,839
(534,416)
(56,577)
Treasury Stock
Minority
Interests
Total Equity
(310)
(310)
24,698,735
991,011
1,301,100
26,990,846
101,834,262
24,372
(1,031,318)
309,015
17,429
991,011
12,792,180
(1,930,139)
113,006,812
(310)
-
21,455,330
1,094,019
974,965
23,524,314
82,749,417
151,975
(534,416)
51,535
106,071
8,404,138
(2,066,917)
974,965
89,836,768
(310)
Page 3
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousand Pesos)
June 30, 2007
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax
Adjustments for:
Interest expense - net of amount capitalized
Amortization of discount on long-term debt - net
Equity in net earnings of associates and joint ventures
Other investment income
Gain on sale of assets
Interest income
Operating income before changes in working capital
Decrease (increase) in:
Inventories
Net pension assets
Cash generated from operations
Interest received
Interest paid
Income tax paid
Total cash provided by (used in) operating activities
June 30, 2006
13,830,159
9,511,931
2,431,851
1,237,239
22,635
34,412
(4,871,262)
50,406
(8,044,997)
(899,051)
3,791,391
2,731,487
891,168
49,774
0
(4,128,432)
(680,476)
(4,584,097)
(687,902)
3,103,453
(1,161,240)
539,072
13,265
946,984
(2,764,397)
(1,697,861)
(49,904)
(717,334)
35,310
1,320,610
5,485,391
922,659
(2,563,351)
(992,658)
2,852,041
1,824,870
120,709
(180,464)
691,711
(2,916,485)
(1,112,562)
(3,517,800)
11,637,432
14,496
7,115,981
17,073
(9,483,814)
(1,086,741)
3,200,307
3,699,794
7,981,473
(2,827,907)
(2,178,043)
2,469,705
69,079
4,665,888
6,660,307
3,475,739
(12,124,203)
(1,281,119)
0
703,807
0
106,071
(3,233,907)
(1,246,816)
(2,230,000)
400,721
1,306,528
(1,562,027)
437,314
1,534,805
(3,928,726)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
9,271,487
23,118,432
(2,780,638)
24,606,220
CASH AND CASH EQUIVALENTS AT END OF PERIOD
32,389,919
21,825,582
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Sale of investments
Disposal of property and equipment
Additions to:
Investments
Property, plant and equipment
Dividends received from associates and joint ventures
Decrease (increase) in other noncurrent assets
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Short-term and long-term debt
Issuance of Common shares
Proceeds from collection of (additions to) subscription receivable
Payment of short and long-term debt
Dividends paid
Redemption of preferred shares
Minority interest in consolidated subsidiaries
Page 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Preparation
The consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the Philippines using the historical cost basis except for
financial assets at fair value through profit or loss, available-for-sale financial assets and
derivative instruments which have been measured at fair value. Accounting principles and
policies applied for the period ending June 30, 2007 are the same as those applied in the
preceding calendar year.
There was no new accounting standard adopted in the first half of 2007 but the Company will
adopt the following standards and amendments within the year:
-
PFRS 7, Financial Instruments: Disclosures, which introduces new disclosures to improve
the information about financial instruments. It requires the disclosure of qualitative
information about exposure to risks arising from financial instruments, including minimal
disclosures about credit risk, liquidity risk, and market risk.
-
PAS 1, Presentation of Financial Statements, requires the Group to make new disclosures
to enable the users of the financial statements to evaluate the Group’s objectives, policies
and processes for managing capital.
-
IFRIC 10, Interim Financial Reporting and Impairment, which requires nonreversal of
impairment loss recognized in a previous interim period in respect of goodwill or an
investment in either an equity instrument or a financial asset carried at cost.
The Group believes that these interpretations will not have a significant impact on the
consolidated financial statements of the Group when the interpretations are adopted in 2007.
Basis of Consolidation
The consolidated financial statements included the financial statements of Ayala Corporation
and the following wholly and majority owned domestic and foreign subsidiaries:
Effective % Ownership
Ayala Land, Inc. (ALI) and subsidiaries
Ayala Hotels, Inc. (AHI) and subsidiaries
Electronics and Information Technology:
Azalea Technology Inv. Inc. and subsidiaries
Integrated Microelectronics, Inc. (IMI) and subsidiaries
Automotive:
Ayala Automotive Holdings Corporation (AAHC)
International and Others:
Ayala International Pte. LTD (AIPL) and subsidiaries
AC International Finance Limited (ACIFL)
Michigan Holdings, Inc. (MHI)
Ayala Aviation Corporation
Darong Agricultural and Development Corporation
PFC Properties, Inc.
53.2
76.6
100.0
70.4
100.0
100.0
100.0
100.0
100.0
100.0
99.9
Page 5
Investments in associates and joint ventures are accounted for under the equity method of
accounting. Major associates and joint ventures and corresponding effective percentages of
ownership as of June 30, 2007 are as follows:
Bank of the Philippine Islands (BPI) and subsidiaries
Globe Telecom, Inc. (GLOBE) and subsidiary
Cebu Holdings, Inc. (CHI) and subsidiaries
Manila Water Company, Inc. (MWCI)
Asiacom Philippines, Inc. (Asiacom)
Philwater Holdings Company, Inc. (Philwater)
Alabang Commercial Corporation (ACC)
Emerging City Holdings, Inc. (ECHI)
Berkshires Holdings, Inc. (BHI)
BLC (through Regent Time International, Limited)
2.
Cash and Cash Equivalents consist of the following (in Thousand Pesos):
Cash on hand and in banks
Cash equivalents
3.
Effective % Ownership
33.6
33.4
47.2
30.0
60.0
60.0
50.0
50.0
50.0
4.0
June 2007
4,620,829
27,769,090
32,389,919
December 2006
3,082,502
20,035,930
23,118,432
June 2007
13,238,304
4,943,163
2,309,457
776,975
217,970
598,947
22,084,816
499,484
21,585,332
3,891,045
17,694,287
December 2006
11,894,098
4,538,052
1,935,112
675,504
125,709
1,262,538
20,431,013
441,637
19,989,376
2,519,816
17,469,560
Accounts and Notes Receivable (in Thousand Pesos):
Trade
Advances and others
Related parties
Advances to contractors
Notes receivable
Dividends
Less allowance for doubtful accounts
Less noncurrent portion
Page 6
4.
Inventories (in Thousand Pesos):
June 2007
Real estate inventories:
Subdivision for sale
Condominium and commercial units for sale
Materials, supplies and others - at NRV (cost of
P1,289,044 in 2007 and P1,142,846 in 2006)
Vehicles (at cost)
Work in process (at cost)
Finished Goods (at cost)
Parts and accessories - at NRV (cost of P117,680 in
2007 and P110,386 in 2006
5.
4,741,102
2,422,487
4,665,464
3,070,123
1,191,664
324,421
296,895
193,250
1,029,214
256,041
482,824
216,587
90,960
9,260,779
83,669
9,803,922
Investments in Bonds and Other Securities (in Thousand Pesos):
Shares of Stocks
Bonds
6.
December 2006
June 2007
5,119,884
69,114
5,188,998
December 2006
3,334,860
127,575
3,462,435
Accounts Payable and Accrued Expenses (in Thousand Pesos):
Interest payable
Related parties
Dividends payable
June 2007
16,049,466
720,010
229,837
2,196,376
19,195,689
December 2006
16,404,495
824,086
132,204
964,931
18,325,716
Accounts payable and accrued expenses pertain to taxes payable, payable to contractors,
retention payables, trade payables and accrual of various expenses incurred.
Page 7
7.
Short-term Debt and Long-term Debt consist of (in Thousand Pesos):
June 2007
Short-term debt:
Foreign Currency with various interest rates
Philippine Peso with various interest rates
Long-term debt:
Company:
Bank loans with various interest rates
Syndicated term loan with interest rates ranging
from 10.6% to 12.0% and varying maturity
dates up to 2008
Fixed Rate Corporate Notes (FXCNs)
Bonds, due 2009
Subsidiaries
Loans fr banks & other financial institutions:
Foreign currency with various interest rates
Philippine Peso with various interest rates
Bonds due 2007
Bonds due 2008
Bonds due 2009
Fixed Rate Corporate Notes
Other US dollar denominated obligations:
8.125% Guaranteed Medium Term Notes
Less current portion
8.
December 2006
505,120
2,211,115
2,716,235
815,787
1,688,220
2,504,007
10,064,394
6,294,697
0
7,190,000
7,000,000
24,254,394
1,250,000
7,190,000
7,000,000
21,734,697
3,524,151
2,328,803
0
2,000,000
65,450
3,580,000
8,154,932
2,658,451
3,000,000
2,000,000
42,960
3,580,000
6,113,811
17,612,215
41,866,609
8,127,373
33,739,236
6,706,393
26,142,736
47,877,433
9,359,594
38,517,839
Other Current/Noncurrent Liabilities
Other Liabilities consists of deposits from commercial center tenants and sale of
condominium/subdivision lots and long-term retention payables. A detailed breakdown is
unavailable since the Company’s consolidation process is based only on the various group
companies’ financial statements and not on their trial balances. Obtaining said details would
involve an unreasonable effort and/or expense since the accounts’ changes since the end of the
most recent calendar year are not significant.
9.
Details of the Company's paid-up capital follow (in Thousand Pesos):
Preferred B
As of June 30, 2007
Adjustment during the period
As of June 30, 2006
5,800,000
5,800,000
-
Common
Stock
Subscribed
Additional Paid- Subscriptions
in Capital
Receivable
Total Paid-up
Capital
17,166,964
3,451,367
4,578
20,622,909
75,754
335,343
(240,113)
75,754
335,343
19,794
(220,319)
23,137,948
3,451,367
24,372
26,613,687
17,137,083
11,699
17,148,782
37,544
38,210
75,754
118,643
206,330
324,973
(333,574)
(150,168)
(483,742)
16,959,696
106,071
17,065,767
Page 8
10.
The following table presents information necessary to calculate EPS:
Jun-07
Jun-06
(In thousands except EPS figures)
Net income applicable to common
Less Dividends on Preferred stocks
Net Income Applicable to Common
Adjusted wieghted average number of common
shares for diluted EPS
Basic EPS
Diluted EPS
11.
11,491,080
(274,276)
11,216,804
413,938
1,987
415,925
27.10
26.97
7,310,119
7,310,119
412,276
2,038
414,314
17.73
17.64
Summarized income statement information:
Except for the BPI, Globe, and Manila Water, no other unconsolidated subsidiaries and
50% or less owned persons accounted for by the equity method passed the 10% tests for
inclusion as cited by Part II (e)(1) and Part I (b)(14).
Below is BPI’s income statement information (in Million Pesos Except EPS Figures):
June 30, 2007
December 31, 2006
Interest Income
Other Income
Total Revenues
16,040
7,130
23,170
33,754
10,641
44,395
Operating expenses
Interest expense
Impairment losses
Total Expenses
9,367
5,792
959
1,191
17,309
17,427
13,794
1,524
2,456
35,201
Net Income for the period
5,860
9,194
5,715
145
5,860
9,040
154
9,194
2.11
3.34
Attributable to:
Equity holders of BPI
Minority Interest
EPS:
Based on 2,704,400K common shares as of
June 30, 2007 and December 31, 2006.
Page 9
Below is BPI’s balance sheet information (in Million Pesos):
June 30, 2007
December 31, 2006
Total Resources
592,635
581,970
Total Liabilities
Capital Funds for Equity Holders
Minority Interest
526,006
65,445
1,185
516,484
64,438
1,048
Total Capital Funds
592,635
581,970
Below is Globe’s income statement information (in Million Pesos Except EPS Figures):
June 30, 2007
December 31, 2006
Other Income
Total Revenues
33,009
486
33,495
59,949
1,154
61,103
Operating Expenses
Cost of sales
Financing costs
Impairment losses and others
Total Expenses
9,840
8,385
1,995
3,267
284
3,299
27,070
18,081
17,137
4,619
3,272
535
5,704
49,348
6,425
11,755
Net Income
EPS:
Basic
Diluted
48.44
48.20
88.56
88.32
As of June 30, 2007
Basic based on 132,115K common shares
Diluted based on 133,305K common shares
As of Dec. 31, 2006
Basic based on 131,998K common shares
Diluted based on 133,099K common shares
Page 10
Below is Globe’s balance sheet information (in Million Pesos):
June 30, 2007
Non-current Assets
Total Assets
Current Liabilities
Non-current Liabilities
Stockholders' Equity
Total Liabilities & Stockholders' Equity
December 31, 2006
22,864
98,436
24,215
100,365
121,300
124,580
26,510
35,505
59,284
25,758
41,874
56,948
121,300
124,580
Below is Manila Water’s income statement information (in Million Pesos Except EPS Figures):
June 30, 2007
December 31, 2006
Operating Revenues
Interest and Other Income
Total Revenues
3,472
157
3,629
6,090
694
6,785
Operating Expenses
1,364
663
485
2,511
3,424
1,135
168
4,391
Net Income
1,118
2,394
0.53
0.53
1.05
1.05
EPS:
Basic
Diluted
As of June 30, 2007
Basic based on 2,013,360K common shares
Diluted based on 2,013,360K common shares
Basic based on 2,005,009K common shares
Diluted based on 2,006,653K common shares
Page 11
Below is Manila Water’s balance sheet information (in Million Pesos):
June 30, 2007
December 31, 2006
Total Non-current Assets
4,906
18,281
7,605
16,657
Total Assets
23,186
24,263
Current Liabilities
Non-current Liabilities
Stockholders' Equity
4,868
5,673
12,645
4,650
7,738
11,874
Total Liabilities & Stockholders' Equity
23,186
24,263
12.
SFAS 31, Segment Reporting, requires that a public business enterprise report financial and
descriptive information about its reportable segments.
The following tables present revenue and net income information regarding business segments
for the periods ended June 30, 2007 and 2006 and total assets and total liabilities for the
business segments as of June 30, 2007 and December 31, 2006 (in Thousand Pesos):
Revenue
Jun-07
Jun-06
Parent Company/Financial Services/
Telecommunications/Water Utilities
Process Outsourcing Services
International
12,157,890
12,378,587
7,817,169
12,886,451
9,612,929
1,516,339
4,810,425
1,240,210
10,722,302
221,371
5,527,083
41,007,233
10,492,728
232,041
4,287,334
35,715,723
189,291
9,517
163,004
11,491,080
1,025,971
124,880
108,633
7,310,119
Total Assets
Jun-07
Dec-06
Parent Company/Financial Services/
Telecommunications/Water Utilities
Process Outsourcing Services
International
Deferred Tax Assets/Liabilities
Net Income
Jun-07
Jun-06
Total Liabilities
Jun-07
Dec-06
79,322,386
78,206,193
72,636,470
79,601,751
39,197,403
28,684,111
40,448,823
30,411,414
21,610,742
7,473,365
2,468,213
1,135,744
190,216,643
19,589,880
7,374,849
2,005,042
1,123,912
182,331,904
7,713,342
385,137
910,130
319,708
77,209,831
8,115,403
471,347
606,919
443,736
80,497,642
13. Detailed schedules have been omitted for purposes of preparing these interim financial
statements as allowed by SRC Rule 68.
Page 12
Item II - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Ayala’s consolidated net income in the first half of 2007 reached P11.5 billion, 57% higher than
earnings in the first half of 2006. Despite the impact of some exceptional items, the fundamental
operating performance of its major business units remained strong and kept equity earnings
stable year-on-year at P6.4 billion. This combined with value realization initiatives and
significantly lower financing expense drove overall earnings higher.
Ayala President and Chief Operating Officer, Fernando Zobel de Ayala said, “we are pleased to
see the underlying strength of our key businesses. We continue to see strong demand across
most of our businesses with our telecom and banking units in particular achieving record
revenue growth in the second quarter. Clearly this is reflective of the positive trends we have
been seeing in the broader economy as we continue to see healthy domestic consumption
underpinning the growth in the consumer and services sector.”
Property unit Ayala Land, Inc., which accounts for 18% of the group’s equity earnings, posted a
12% net income growth to P2.1 billion. Demand for Ayala Land’s projects remained strong
across most business lines. Overall demand for residential projects continued to grow with unit
bookings up 69% versus the same period last year. Revenues from shopping centers were up
9% driven by higher average occupancy rate and higher average rent. Net operating income
margins also improved for the company’s major business lines. Ayala Land’s earnings would
actually have grown by a more robust rate of 24% year-on-year, excluding the after-tax impact
of gains from the sale of Oakwood this year and the Atrium last year.
Banking unit Bank of the Philippine Islands (BPI) turned in a 24% increase in net income to P5.7
billion for the first semester. Total revenues were up 18% driven by higher net interest and noninterest income. Net interest income grew by 7% despite lower net interest margins, due to a
10% improvement in its average asset base. Non-interest income grew by 37% with the strong
earnings of the bank’s insurance subsidiaries, higher income from asset sales, rental income,
and foreign exchange and securities trading gains. The bank maintains its leadership in the trust
business with over P230 billion in assets managed. Loan growth was more robust at 11%, the
fastest organically driven growth recorded in the past seven years and ahead of industry’s 6.1%.
Lending growth was noted in all sectors but SME/middle market showed the strongest at 13%,
while mortgage loans in the consumer sector were the highest with an 18% improvement. With
the sale of an additional P3.6 billion worth of NPLs, BPI’s NPL fell further to 4.2% from 6.1% a
year ago and is lower than the industry’s 5.3% (as of May-07).
Its telecom business, Globe Telecom, recorded historical high revenues and core net income in
the second quarter. Overall, wireless service revenues expanded by 12% in the first semester
mainly driven by the sustained popularity of unlimited SMS and bucket voice offers, as well as
higher prepaid top-up levels. Wireless subscribers now total over 18 million, 30% higher versus
June 2006 levels. Its wireline business continued to register modest growth with revenues up
3% driven by the continued growth of the broadband segment following significant
improvements in its broadband subscriber base. Consolidated EBITDA and EBIT increased by
11% and 15% year-on-year, to P20.9 billion and P12.6 billion, respectively. EBITDA margins
stood at a healthy 66%, while EBIT margins were at 40% from 38% last year. This puts Globe’s
net income after tax as of the first half of the year at P6.4 billion, 12% higher year-on-year.
Excluding the impact of the bond redemption costs and foreign exchange mark-to-market gains
or losses in the first quarter of this year, core net earnings of P7.4 billion for the first half grew
faster at 20% from last year’s P6.1 billion.
Manila Water posted an 18% growth in operating revenues in the first half of the year to P3.5
billion. This was attributed to higher billed volumes, which reached a record high of 1.05 billion
liters per day, a 13% increase year-on-year.
Page 13
This was an offshoot of its expansion programs which enabled the company to add 61,000 new
household connections during the first six months, bringing total households served to 953,000.
With consistent improvements in operating efficiency, non-revenue water (NRW) dropped
further to 25% as of end June, four percentage points lower than the previous year’s level.
While pre-tax income rose by 30%, the expiration of the company’s income tax holiday in 2006
pushed net income 9% lower to P1.1 billion for the first half of the year.
Its electronics business, Integrated Microelectronics, Inc. posted a 4% growth in revenues to
US$199 million but higher general and administrative expenses related to its integration projects
resulted in a 30% decline in net income during the period. IMI remains competitive in the global
market notwithstanding the recent appreciation of the peso given its strong customer
relationships and proven capability to deliver quality products and services to its global
customers. It recently expanded its manufacturing capacity with a 12,500 square-foot facility in
Shenzhen, which is its fifth plant in China.
Proceeds from Ayala’s value realization initiatives and healthy dividend flows from subsidiaries
put the parent’s cash level at P20 billion by the end of the first half, giving the company flexibility
to further reduce debt and financing expenses. Net debt as of the end of the first semester was
at P13 billion with net debt to equity at 0.15 to 1 from 0.29 to 1 at the start of the year. The
company continued to aggressively pre-pay debt and refinance existing obligations to take
advantage of the low interest rate environment. Year-to-date July it has pre-paid around P7
billion in outstanding loans and lowered financing cost.
Ayala Chairman and CEO, Jaime Augusto Zobel de Ayala noted, “the group’s financial position
is at its strongest in the past decade and we are pursuing our efforts to expand the group’s
growth platform in new sectors. We continue to nurture our initial investments in the BPO space
and continue to explore other industries that are beginning to open up and presenting
opportunities for broader private sector participation.”
Key Performance indicators:
For the balance sheet items (current ratio and debt to equity ratios), the company aims to maintain
for its current ratio not to be lower than 0.5:1 and for its debt to equity ratio not to exceed 3:1. The
company and its subsidiaries' ratios are considered better than these levels as a result of prudent
debt management policies.
The key performance indicators (consolidated figures) that the Company monitors are the
following:
Revenue
Net income
Basic earnings per share 1/
YTD June 30, 2007
41,007 million
11,491 million
27.10
YTD June 30, 2006
35,716 million
7,310 million
21.28
Current Ratio 2/
Debt-to-Equity Ratio 3/
As of June 30, 2007
1.88
0.55
1.70
0.69
1/ Net income applicable to common shareholders / weighted average number
of common shares
2/ Current assets / current liabilities
3/ Short-term debt, current & non-current long-term debt, current & non-current
cumulative redeemable preferred shares / equity attributable to equity holders of the parent
Page 14
2.1
Any known trends or any known demands, commitments, events or uncertainties that will
result in or that are reasonably likely to result in the registrant’s liquidity increasing or
decreasing in any material way. The following conditions shall be indicated: whether or not
the registrant is having or anticipates having within the next twelve (12) months any cash
flow or liquidity problems; whether or not the registrant is in default or breach of any note,
loan, lease or other indebtedness or financing arrangement requiring it to make
payments; whether or not a significant amount of the registrant’s trade payables have not
been paid within the stated trade terms.
The company does not expect any liquidity problems and is not in default of any
financial obligations.
2.2 Any events that will trigger direct or contingent financial obligation that is material to the
company, including any default or acceleration of an obligation:
None
2.3 All material off-balance sheet transactions, arrangements, obligations (including contingent
obligations), and other relationships of the company with unconsolidated entities or other
persons created during the reporting period:
None
2.4 Any material commitments for capital expenditures, the general purpose of such
commitments, and the expected sources of funds for such expenditures.
For year 2007, Ayala Land‘s consolidated budget for project and capital expenditures
amount to P16.2 billion. About 55% is earmarked for residential developments, 24%
for shopping centers, and the balance for corporate business, strategic landbank
management, Visayas-Mindanao, support businesses, and corporate capex. This will
be financed through a combination of internally-generated funds, borrowings, preselling and with proceeds from sale of receivables and non-core assets.
For the first six months of 2007, consolidated project and capital expenditures
amounted to P6.9 billion, about 43% of the P16.2 billion budget for the whole year.
About 48% was spent for residential projects, 37% for shopping centers, and the
balance for Visayas-Mindanao, strategic landbank management, corporate business,
support businesses, and corporate capex.
2.5
Any known trends, events or uncertainties that have had or that are reasonably expected to
have a material favorable or unfavorable impact on net sales or revenues or income from
continuing operations should be described.
Ayala Land’s performance will continue to hinge on the overall economic performance
of the country. Interest rate movements may affect the performance of the real estate
industry, including the Company.
2.5 Any significant elements of income or loss that did not arise from the registrant's continuing
operations.
None
Page 15
2.7
Causes for any material changes
(Increase or decrease of 5% or more in the financial statements)
Balance Sheet items
(June 30, 2007 Vs December 31, 2006)
Cash and cash equivalents – 40% increase from P23,118mln to P32,390mln
Due to proceeds from sale of shares of stocks, cash dividends received, increased collections partly
offset by net loans paid and payment to suppliers. As a percentage to total assets, cash and cash
equivalents increased from 13% to 17% as of December 31, 2006 and June 30, 2007,
respectively.
Inventories – 6% decrease from P P9,804mln to P9,261mln
Primarily due to sale of units at existing residential projects by the real estate group. As a
percentage to total assets, inventories remained at 5% as of December 31, 2006 and June 30,
2007.
Other current assets – 24% decrease from P3,961mln to P3,014mln
Sale of marketable securities partly offset by higher prepaid expenses by the real estate group.
Other current assets remained constant at 2% of the total assets as of December 31, 2006 and
June 30, 2007.
Noncurrent assets held for sale – 100% decrease from P3,658mln to P-02006 noncurrent assets held for sale includes investments of the real estate and international
groups sold in 2007. This account is 2% of the total assets as of December 31, 2006.
Noncurrent accounts and notes receivable – 54% increase from P2,520mln to P3,891mln
Due to availment of longer payment terms and additional sales at new and existing projects by the
real estate group. Noncurrent accounts and notes receivable slightly increased from 1% of the total
assets as of December 31, 2006 to 2% as of June 30, 2007.
Investments in associates and joint ventures – 1% increase from P68,569,mln to P69,513mln
investments in various affiliates which are being accounted for under the equity method. These
affiliates are Bank of the Philippine Islands, Globe Telecom and Manila Water Corporation, among
others.
The increase is largely due to the 2007 equity share in earnings of affiliates and higher investment
by the real estate subsidiary in North Triangle (Trinoma). This account slightly decreased from 38%
of the total assets as of December 31, 2006 to 37% as of June 30, 2007.
Investment in bonds and other securities – 50% increase from P3,462mln to P5,189mln
New investments and marked to market investments of the electronics, information technology,
business process outsourcing services group. This account is 2% and 3% of the total assets as of
December 31, 2006 and June 30, 2007, respectively.
Pension assets – 7% decrease from P203mln to P188mln
Decrease in pension assets of the electronics, information technology, business process
outsourcing services group. This account remained at .1% total assets as of December 31, 2006
and June 30, 2007.
Intangible assets – 9% decrease from P4,631mln to P4,206mln
Due to lower peso exchange rate and amortization in 2007. As a percentage to total assets, this
account slightly decreased from 3% as of December 31, 2006 to 2% as of June 30, 2007.
Other noncurrent assets –17% increase from P1,785mln to P2,089mln
Advances and pre-operating expenses for future projects by the real estate group and deposit for
various facilities by the electronics, information technology, business process outsourcing services
group. As a percentage to total assets, this account remained at 1% as of December 31, 2006 and
Page 16
June 30, 2007.
Accounts payable and accrued expenses – 5% increase from P18,326mln to P19,196mln
Dividends payable partly offset by lower interest payable and accrual of expenses by the parent
company and additional purchases on account by the electronics, information technology and
business process outsourcing services group. As of December 31, 2006 and June 30, 2007, this
account is at 23% and 25% of the total liabilities, respectively.
Income tax payable –15% increase from P296mln to P 341mln
Due to higher income subjected to income tax by the international group. As of December 31, 2006
and June 30, 2007, this account remained at .4% of the total liabilities.
Short-term debt –8% increase from P2,504mln to P 2,716mln
Largely due to loans availed by the real estate group partly offset by loan payments by the
international and electronics, information technology and business process outsourcing services
group. As of December 31, 2006 and June 30, 2007, this account is at 3% and 4% of the total
liabilities, respectively.
Current portion of long-term debt – 13% decrease from P9,360mln to P8,127mln
Payment of P3bln bonds by the real estate group and loan repayment by the parent company partly
offset by the reclassification of current maturing loans from long-term debt to current portion. As a
percentage to total liabilities, current portion of long-term debt is at 12% and 11% as of December
31, 2006 and June 30, 2007, respectively.
Other current liabilities – 91% increase from P1,453mln to P2,774mln
Mainly due to higher buyers’ deposits by the real estate group. As a percentage to total liabilities,
current portion of long-term debt increased from 2% as of December 31, 2006 to 4% as of June 30,
2007.
Liabilities directly associated with noncurrent assets held for sale – 100% decrease from P469mln
to P-0Due to sale of assets previously booked as held for sale. As a percentage to total liabilities, this
account is at 1% as of December 31, 2006.
Long-term debt – 12% decrease from P38,518mln to P33,739mln
Mainly due to the reclassification of current maturing loans to current portion of long-term debt. As a
percentage to total liabilities, long-term debt is at 48% and 44% as of December 31, 2006 and June
30, 2007, respectively.
Deferred tax liabilities – 28% decrease from P444mln to P320mln
Due to the tax effect of collection of receivables on projects which have yet to be completed by the
real estate group. As a percentage to total liabilities, deferred tax liabilities is at 0.55% and 0.41% as
of December 31, 2006 and June 30, 2007, respectively.
Other noncurrent liabilities – 14% increase from P6,141mln to P7,011mln
Mainly due to increase in buyers’ deposits and tenants’ deposits of the real estate group.
account is at 8% and 9% of the total liabilities as of December 31, 2006 and June 30, 2007.
This
Paid-up capital – 15% increase from P23,138mln to P26,614mln
Due to 20% stock dividend.
Cumulative translation adjustment – 346% decrease from (P298mln) to (P1,330mln)
Mainly due to forex rate changes.
Net unrealized gain on available-for-sale investments – 15% increase from
P2,388mln
Due to revaluation of investments in securities.
P2,079mln to
Minority interest – 9% increase from P24,699mln to P26,991mln
Largely due to share of minority holders in 2007 net income and increased share due to reduced
shareholdings by the equity holders of the parent.
Page 17
(YTD June 2007 Vs YTD June 2006)
Sales and services – 3% increase from P26,251mln to P27,075mln
Higher unit sales by the automotive group, higher sales volume of existing businesses and
contributions from the operations of newly acquired companies by the electronics and information
technology group partly offset by lower revenue from the real estate group primarily due to change
in revenue recognition policy, deferred recognition of construction revenue, absence of industrial lot
th
sales in 2007 and sale of People Support building in 4 quarter 2006.
Sales and services contributed 66% of the total revenue in 2007 and 75% in 2006.
Equity in net earnings of associates and joint ventures – 18% increase from P4,128mln to
P4,871mln
Higher earnings of the parent company’s and real estate group’s associates.
This account is 9% and 12% of the total revenue in 2006 and in 2007, respectively.
Interest, rental and other investment income – 70% increase from P5,336mln to P9,061mln
Largely due to capital gains from sale of shares.
This account is 17% and 22% of the total revenue in 2006 and in 2007, respectively.
Cost of sales and services – 3% increase from P20,070mln to P20,711mln
Relative to higher sales.
Cost of sales and services is 76% and 73% of the total costs and expenses for the period ending
June 30, 2006 and June 30, 2007, respectively.
General and administrative expenses – 19% increase from P3,516mln to P4,196mln
Largely due to the GAE of the new subsidiary and higher manpower costs, depreciation and
amortization expenses of the electronics, information technology and business process outsourcing
services group.
This account is 13% and 15% of the total costs and expenses for the period ending June 30, 2006
and 2007, respectively.
Interest and other charges – 13% decrease from P2,618mln to P2,270mln
Lower interest payables due to lower loan levels in 2007.
Provision for income tax – 6% decrease from P1,108mln to P1,038mln
Lower income in 2007 subject to income tax.
2.8 Any seasonal aspects that had a material effect on the financial condition or results of
operations.
Ayala Corporation being a holding company has no seasonal aspects that will have any
material effect on its financial condition or operational results. However, Ayala Land’s leasing
portfolio generates a fairly stable stream of revenues throughout the year, with higher sales
experienced in the fourth quarter from shopping centers due to holiday spending. Ayala Land’s
development operations do not show any seasonality. Projects are launched anytime of the year
depending on several factors such as completion of plans and permits and appropriate timing in
terms of market conditions and strategy. Development and construction work follow target
completion dates committed at the time of project launch.
Page 18
PART II – OTHER INFORMATION
1. Ayala Corporation’s holding company for investments in the Business Process Outsourcing
(BPO) sector, LiveIT acquired 100% of Affinity Express, Inc., a Delaware incorporated
company, in partnership with Affinity Express’s existing management team.
LiveIT made an additional investment of $11 million in Integreon Managed Solutions, Inc.
2. Mr. Renato O. Marzan, duly appointed, qualified and incumbent compliance officer of Ayala
Corporation executed a certification on compliance of the corporation to the Corporate
Governance Manual.
3. Ayala International Holdings Limited (AIHL), a 100% owned subsidiary of Ayala International
Pte. Ltd, which in turn is a 100% owned subsidiary of Ayala Corporation entered into a sale
and purchase agreement with Hotel Properties Limited (HPL) for the sale of its 23.3%
interest in Hermill Investments Pte. Ltd. (Hermill).
4. Ayala Corporation reported Net Income of P12.2B for the year 2006, 49% higher than 2005.
5. At the regular meeting of the Board of Directors of Ayala Corporation on 15 March 2007, the
Board approved the declaration and payment from the unappropriated retained earnings as
of December 31, 2006 of the quarterly cash dividends of 9.4578% per annum to all
shareholders of the Corporation’s outstanding Preferred Class B shares with record date of
3 April 2007 and payable on 23 April 2007.
6. At the Annual Stockholders’ meeting of the Company held on 30 March 2007,
stockholders approved the following:
the
x
Election of the following Directors for the ensuing year:
Jaime Augusto Zobel de Ayala II
Delfin Lazaro
Xavier P. Loinaz
Toshifumi Inami
Meneleo J. Carlos, Jr. - elected as the independent director
x
Ratification of the increase in Authorized Capital Stock from Twenty Six Billion
(P26,000,000,000.00) to Thirty Seven Billion (P37,000,000,000.00) and the
amendment of Article Seventh of the Corporation’s Amended Articles of
Incorporation.
x
Ratification of the declaration of the 20% stock dividend to all stockholders.
x
Ratification of the Merger into Ayala Corporation of its 99.85% owned subsidiary,
PFC Properties, Inc.
x
Appoinment of Sycip, Gorres, Velayo & Co. as the external auditors of the
Company for the ensuing year.
The new Board approved the following appointments:
a. Board committees and memberships:
x Executive Committee
Jaime Augusto Zobel de Ayala II – Chairman
Fernando Zobel de Ayala – Member
Toshifumi Inami – Member
Page 19
x
Audit Committee
Meneleo J. Carlos, Jr. – Chairman
Xavier P. Loinaz – Member
x
Nomination Committee
Jaime Augusto Zobel de Ayala II – Chairman
Fernando Zobel de Ayala – Member
Meneleo J. Carlos, Jr. – Member
x
Compensation Committee
Meneleo J. Carlos, Jr. – Chairman
Delfin Lazaro – Member
b. Other Corporate Officers AyalaGroup/ManCom Members:
Jaime Augusto Zobel de Ayala II - Chairman of the Board & CEO
Fernando Zobel de Ayala - Vice Chairman of the Board, President &
Chief Operating Officer
Ariston Estrada, Jr.
- Senior Managing Director, Mancom Member
- Senior Managing Director & Corporate
Secretary, Mancom Member
Delfin L. Lazaro
Gerardo C. Ablaza, Jr. - Senior Managing Director, Mancom Member
Antonino T. Aquino
Jaime I. Ayala
Rufino Luis T. Manotok - Senior Managing Director, CFO, Chief
Information Officer, Mancom Member
Arthur R. Tan
Charles H. Cosgrove
- Managing Director, Mancom Member
Aurelio R. Montinola
- Mancom Member
Ramon G. Opulencia
- Managing Director & Treasurer
Renato O. Marzan
- Managing Director, General Counsel, &
Compliance Officer
- Managing Director, Head of SHROD
7. The Securities and Exchange Commission (SEC) approved on 30 April 2007, the
Company’s application for an increase in capital stock from P26 Billion to P37 Billion and
the corresponding Amendment of the Articles of Incorporation, and the payment of the 20%
stock dividend to all stockholders of record as of 22 May 2007, payable on 18 June 2007.
8. Ayala Corporation’s net income up 80% in first quarter of 2007. The strong operating
performance of its major business units coupled with capital gains from share sales drove
the company’s earnings to P5.6 billion in the first quarter of the year, 80% higher than the
same period last year and the highest ever recorded in a quarter.
9. The Board of Directors of Ayala Corporation, at its meeting on 14 June 2007 approved the
following:
a. The declaration and payment from the unappropriated retained earnings of the
Corporation as of 31 December 2006, of the quarterly cash dividends of 9.4578%
per annum, to all shareholders of the Corporation’s outstanding Preferred Class B
shares with record date of 3 July 2007 and payable on 23 July 2007.
b.
The declaration of regular cash dividend of P2.00 per share and special cash
dividend of P2.00 per share corresponding to the first semester ending 30 June
2007, to all outstanding common shares of the Corporation’s capital stock as of
record date 06 July 2007, payable on 31 July 2007.
Page 20
AYALA CORPORTION AND SUBSIDIARIES
AGING OF RECEIVABLES (Based on Unaudited Figures)
As of June 30, 2007
(In Thousand Pesos)
Up to
6 months
Over 6 Mos.
to One year
Over One
Year
Trade Receivables
7,745,053
2,205,243
2,609,245
Non-Trade Receivables
3,718,802
3,607,190
1,281,801
11,463,855
5,812,433
3,891,046
Total
Past
Due
385,000
33,000.00
418,000
TOTAL
12,944,541
8,640,793
21,585,334

AC_2012_Fixed Rate Bonds_Final Prospectus_8 Nov 07

Transcription

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